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July 21, 2009

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Gearing up for rule on transfer pricing

MORE Chinese companies are increasing efforts to comply with a new rule on transfer pricing as China steps up action to curb tax avoidance by manipulating prices, industry veterans said.

The State Administration of Taxation, China's top tax authority, had issued a new rule on special tax adjustment earlier this year to clarify any questions over transfer pricing.

"The new rule has leveled 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 that would help to manage compliance risks."

Chinese companies with overseas business are increasing their understanding of the issue and to comply with it, Tien said.

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

"Most companies now 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 even though it's quite technical and complex."

Transfer pricing could be regarded as a main avenue to avoid tax payment by shifting profits to countries with lower tax rates through cross-border related party transactions.

China is using legislation and policy changes to beef up its tax avoidance efforts, and the number of state tax officers working specifically on anti-tax avoidance issues is likely to more than quadruple to 500 by 2011 from 120 last year.

The SAT also requires companies to offer contemporaneous documentation for possible tax probes.

"Companies should prepare contemporaneous documents as soon as possible," said Jeff Yuan, PricewaterhouseCoopers Tax partner in Shanghai, although this year's deadline is December 31.


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