Transfer Pricing

Introduction

In light of the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) program, the China tax authorities have been focusing on transfer pricing. This has been done by enforcing strict strong local transfer pricing regulations/rules, imposing detailed compliance requirements and invoking ever-increasing scrutiny on related party transactions.

In the context of this focus on transfer pricing, it is important that companies assess their risks and document their transfer pricing policies with respect to their China operations.

International tax challenges in China

Related party filing
All enterprises in China with related-party transactions must submit "Enterprise Annual Reporting Forms for Related-Party Transactions" to the tax authorities together with their annual tax returns.

Transfer Pricing documentation
Enterprises that do not fall into any of the exempted categories should prepare, retain and upon request of the tax authorities, submit contemporaneous documentation for each tax year. If an enterprise fails to provide contemporaneous documentation, the tax authorities have the right to impose penalties including fines and to deem its taxable income by assigning profits based on their own calculations.

Thin capitalisation
The China tax authorities have introduced provisions on thin capitalisation, and have clarified the safe harbor threshold for related party debt to equity ratios. However, an enterprises lending may also be allowed to exceed the safe harbour limits if the related-party loans can be proven to be in compliance with the arm's- length principle.

Transfer pricing investigations
Authorities have the right to use non-public information and materials in transfer pricing investigations and adjustments.

After the execution of any transfer pricing adjustments as a result of an investigation, the tax authorities will follow up with the enterprise for five years from the year after the adjustment. The enterprise is required to provide contemporaneous documentation for each of these follow-up years.

How Dezan Shira and Associates can help

Our transfer pricing professionals can provide transfer pricing advice and services in the following areas:

  • Annual reporting forms: Review and/or preparation of the annual reporting forms to manage non-compliance risks and avoid penalties or investigations resulting from overdue related party filings.
  • TP documentation: Review and/or prepare contemporaneous documentation in accordance with the tax authorities' requirements.
  • Thin capitalisation: In order to support the deductibility of all interest expenses, we can assist in preparing contemporaneous documentation studies to demonstrate that your company’s financing structure and applied interest rates are consistent with the arm's length principle.
  • Transfer Pricing investigations: We have extensive experience in helping clients respond to transfer pricing investigations from the China tax authorities.
  • Planning: We can help you create a robust transfer pricing strategy that is practical to implement. This planning includes providing economic analysis to support changing the current transfer pricing policy while mitigating the influence of taxation.
  • Risk assessment: We can help you monitor and revise your intercompany transactions, and recommend modifications or adjustments to your transfer pricing policies and their implementation.

The abovementioned services are intended to highlight the range of services we currently provide our clients. We would be pleased to have a conversation with you to hear about your particular needs and requirements. From there, we can prepare a precise scope of work and fee proposal taking these into account.

Why Dezan Shira & Associates?

Dezan Shira’s transfer pricing practice specifically focuses on advising foreign companies with respect to the transfer pricing aspects of their operations and investments in China and throughout the Asia Pacific region. We are experts in this field and have a strong working relationship with the China tax as well as overseas tax authorities at all levels.

Dezan Shira is a pan-Asia, multi-disciplinary professional services firm, providing tax, legal, accounting and payroll as well as operational advisory services. Dezan Shira is in its third decade of operations and has subsequently grown to support 28 offices (12 of which are in China, including Suzhou) and over 300 staff in our operations throughout China, Hong Kong, India, Singapore, and Vietnam together with our alliance partners in Indonesia, Malaysia, the Philippines and Thailand.

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