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Chinese firms beef up compliance on transfer pricing

MORE Chinese companies are adding compliance efforts on transfer pricing as efforts mount to curb tax avoidance, industry veterans said.

The State Tax Administration, China's top tax authority, issued a new rule on special tax adjustments earlier this year to clarify issues on transfer pricing.

"The new rule has put forth a fair playground for all parties involved with increased clarity," said Jessica Tien, an Ernst & Young tax partner. "Multinational companies familiar with transfer pricing issues in overseas markets now have a transparent standard in China to manage compliance risks."

Chinese companies with overseas business are building up their strength to understand and comply with the issue as well, Tien said.

In the past, Chinese companies might not have focused on transfer pricing.

"Most companies take it seriously and are adding internal and external resources to tackle the issue," Tien said. "It's uncommon to find companies ignoring the issue though it's quite technical and complex."

Transfer pricing, a neutral concept, could be regarded as the main way to avoid tax by shifting profits to countries with lower tax rates through cross-border transactions.

China is beefing up its transfer pricing adjustment capacity by legislation and policy changes including a documentation requirement and more circulars.

China had about 120 state tax officers working on tax evasion issues in 2008. The figure is expected to more than quadruple to 500 in 2011.

Chapter six of the enterprise income tax law, titled Special Tax Adjustments, contains the transfer pricing considerations. The tax body also requires companies to offer documentation for possible tax probes.

"Companies should prepare documentation requirements as soon as possible though this year's deadline is the year-end," said Jeff Yuan, a PricewaterhouseCoopers tax partner in Shanghai.

Yuan said the documentation requirements entail that the burden of proof will be shifted to taxpayers, which will save tax body resources and force companies to better learn the specifics of transfer pricing issues.

The State Tax Administration collected 1.24 billion yuan of tax payments on transfer pricing manipulation in 2008, up 24 percent year on year.

China started checks on tax avoidance related to transfer pricing in 1986 in Shenzhen and a nationwide campaign began in the 1990s.

In China, transfer pricing is more frequent in Beijing, Shanghai, Tianjin and coastal areas such as Dalian in multinational manufacturing sectors such as office equipment, chemicals and autos.

If a multinational company in China is losing money while expanding business rapidly with frequent cross-border transactions, the tax authority will target it for auditing.


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