SlideShare a Scribd company logo
China’s transfer pricing system
Zhang Ying
State Administration of Taxation of
People’s Republic of China
Introduction
With the integration of China’s economy into
the world, more and more MNEs have
entered into the Chinese market.
At the same time, outbound investments byAt the same time, outbound investments by
Chinese domestic company have been
exponentially growing.
Consequently, transfer pricing has been
becoming a more and more pressing issue
for Chinese tax authority.
Outline
The development of China’s transfer pricing
legal framework
The development of China’s transfer pricing
practicepractice
Special considerations on Chinese factors
Development trend of China’s transfer
pricing system
The development of China’s
transfer pricing legal system
On July 1 1991, the Income Tax Law for Foreign
Investment Enterprises and Foreign Enterprises
( known as “the FEIT Law”) and its implementing
rules came into force.
FEIT law adopts arm’s length principle as the
basis for china’s transfer pricing system and tax
authorities are authorized to adjusted a Foreign
Investment Enterprise and Foreign Enterprise’s
taxable income where it has been reduced as a
result of non-arm’s length prices.
The development of China’s
transfer pricing legal system
In 2007, China promulgated Corporate Income
Tax law (“CIT”) and its implementing rules ,which
have been in force since Jan 1, 2008.
The new CIT mergers the Enterprise Income Tax
Law (which previously applied to domesticLaw (which previously applied to domestic
enterprises) and the Foreign Enterprise Income
Tax Law (which previously applied to foreign
enterprises).
The development of China’s
transfer pricing legal system
In the new CIT law and its implementation
rule, Chapter 6 “special tax adjustment” is
aimed at regulating transfer pricing issues.aimed at regulating transfer pricing issues.
The cornerstone of
“special tax adjustment” Chapter
Arm’s length principle
The CIT Law provides the arm’s length
principle standard as the guiding principle
for related party transactions, andfor related party transactions, and
empowers the tax authority to adjust a
taxpayer’s taxable income if the taxpayers
fails to comply with the arm’s length
principle in dealing with related parties.
The scope of
“Special Tax Adjustment ”chapter
Transfer pricing
Advance pricing agreement
Cost sharing arrangement
Annual disclosure of related transactions and
contemporaneous documentation
Annual disclosure of related transactions and
contemporaneous documentation
Controlled foreign enterprises
Thin capitalization
General tax avoidance
Special interest Levy
Law Regulations Rulings
The current legal framework
Corporate
Income Tax Law
Tax collection
and
administration
law
Implementation
rules of CIT
Implementation
rules of Tax
Collection and
Administration
law
Detailed rules
and circulars for
tax laws and
regulations
The development of
China’s transfer pricing practice
The first case was initiated in 1986
In the early years, transfer pricing audits are
mainly focused on transfer of tangible good.
In recent years, audit targets have beenIn recent years, audit targets have been
broadened with transfer of intangible good,
services, equity shares as well as tangible
goods.
Practical guidance for
transfer pricing auditors
Circular Guoshuifa [2009] No 2, “The
implementation measures of Special Taxation
Adjustment”, which is a detailed transfer pricing
audit directive.audit directive.
Investigation cases
closed in recent years
2006 2007 2008 2009 2010 2011
Number of
adjustments
177 174 152 167 178 207
adjustments
Average adjustment
(RMB millions)
3.84 5.75 8.16 12.51 14.5 11.8
Approximate total
adjustment (RMB
millions)
458 680 1,000 1,240 2,089 2,581
APA annual report
In December 2010, SAT issued the first ever
annul report on APA in China for 2009,
which initiated China’s annual APA reporting
system.system.
Number of APA
Signed in recent years
Year Unilateral APAs Bilateral APAs Multilateral APAs Total
2005 13 1 0 14
2006 10 0 0 10
2007 7 3 0 10
2008 6 1 0 7
2009 5 7 0 12
2010 4 4 0 8
Total 45 16 0 61
The creation of “three in one ”
anti-tax avoidance system
In order to optimize the limited transfer pricing
audit resources and achieved the goal of “both
prevention and investigation”, SAT created a
“three in one” anti-avoidance administrative“three in one” anti-avoidance administrative
system which includes administration, service
and investigation.
Administration
Rely on mechanism such as mandatory
related-party transaction reporting, examination
of contemporaneous documentation and follow-
up measures to encourage taxpayer to perform
a self-examination and self-correction of theira self-examination and self-correction of their
transfer pricing policies.
In order to minimize transfer pricing risks from
the beginning.
Service
APA: provide certainty for taxpayers on its
transfer pricing policy
Map: create a channel for taxpayer to resolve
disputes and minimize the risk of doubledisputes and minimize the risk of double
taxation
Investigation
Strengthening investigation on MNS with huge
amount of related transactions and
unreasonable transfer pricing policies
Joint investigationJoint investigation
Standardized working procedure
In order to run the transfer pricing
administration in a more efficient and effective
manner and with a high degree of consistency
and transparency, all transfer pricing casesand transparency, all transfer pricing cases
must be reported to the SAT for final review
and assessment after they have been
examined by different tax authorities at various
levels.
The weakness in
applying OECD guideline
Difficult to find perfect comparables due to the
limited amount of Chinese listed companies in
china and lack of information sharing
mechanism among different administrationmechanism among different administration
authorities and different regions.
Difficult to make reasonable adjustment
between Chinese companies and comparables
located oversees.
The ways to
overcome the weakness
Besides searching for desirable comparable
for tested party, we tend to analyze the profit
of the tested party in the context of whole
supply chain.supply chain.
By doing so, we want to rationalize the
appropriateness of allocation of Chinese
company’s profit in the whole supply chain
of MNEs, unaffected by their related position.
The ways to
overcome the weakness
Therefore, we need to focus on the value
drives with unique Chinese characteristics
which contributes to the residual profit of the
whole supply chain.whole supply chain.
Special consideration
on Chinese factors
Location saving
Market premium
Unpaid pollution
Location Saving
Lower cost of labor
Better infrastructure and logisticsBetter infrastructure and logistics
Location Saving
More importantly, location saving is reflected in
the unique contribution made by low-paid
Chinese engineers and technicians who
improve and refine the technology provided byimprove and refine the technology provided by
the associated company and fostered
incomparable intangibles which cater to the
needs of customers.
Market premium
Huge population
Exponential growth of Chinese middle classExponential growth of Chinese middle class
Environmental cost
High emission of pollution by MNC
As a manufacturer, the cost of manufacturing isAs a manufacturer, the cost of manufacturing is
more than what is recorded on the book.
Taking the car manufacturing
as an example
10, 33010, 33010, 33010, 330
13, 76013, 76013, 76013, 760 13, 70013, 70013, 70013, 700
10000100001000010000
12000120001200012000
14000140001400014000
t
h
o
u
s
a
n
d
c
a
r
s
t
h
o
u
s
a
n
d
c
a
r
s
t
h
o
u
s
a
n
d
c
a
r
s
t
h
o
u
s
a
n
d
c
a
r
s
Chi na paseenger car sal esChi na paseenger car sal esChi na paseenger car sal esChi na paseenger car sal es
754754754754
5, 6005, 6005, 6005, 600
0000
2000200020002000
4000400040004000
6000600060006000
8000800080008000
10000100001000010000
u
n
i
t
u
n
i
t
u
n
i
t
u
n
i
t
::::
t
h
o
u
s
a
n
d
c
a
r
s
t
h
o
u
s
a
n
d
c
a
r
s
t
h
o
u
s
a
n
d
c
a
r
s
t
h
o
u
s
a
n
d
c
a
r
s
2001200120012001 2008200820082008 2009200920092009 2010201020102010 2011201120112011
Are we simply contract
manufacturers?
In the MNEs’ supply chain, Chinese companies
are usually characterized as contract
manufactures.
However, concerned with the unique factorsHowever, concerned with the unique factors
with Chinese characteristics, should we be
rewarded simply as contract manufacturer?
Issues we concern
Royal t i es pai d t o f or ei gn compani es( uni t : USmi l l i ons)
10, 300 11, 100
13, 000
14, 700
10, 000
12, 000
14, 000
16, 000
18, 000
6, 006
8, 200
10, 300
0
2, 000
4, 000
6, 000
8, 000
10, 000
2006 2007 2008 2009 2010 2011
Issues we concern
Is technology the most important value drivers
of the profit of the company?
Do we really need it?
How much contribution does the technologyHow much contribution does the technology
make to the profit of the supply chain?
How about the local R&D value?
Issues we concern
Huge amount of meticulous fees paid by
Chinese companies to their associated
companies.
If the Chinese companies are characterizedIf the Chinese companies are characterized
only as contract manufactures, do we really
need so many sophisticated services?
Solution
More frequent use of Profit split method or
hybrid methods to test whether or not the result
reflects the reasonable allocation of profit ofreflects the reasonable allocation of profit of
whole supply chain
Development trend of
transfer pricing system
Further refining the anti-avoidance legal
framework
Development trend of
transfer pricing system
Expanding the database
Greater cooperation in the area of exchange
of information with other administration
authorities.authorities.
Creation of a national database which allows
for the sharing of tax filing information among
tax authorities in different regions.
Development trend of
transfer pricing system
More efforts will be put on prevention of tax
avoidance.
Engaging in more bilateral APAs to reduce the
uncertainties for taxpayers.uncertainties for taxpayers.
Encouraging the use of MAP to resolve transfer
pricing controversy
Development trend of
transfer pricing system
Expanding the target of audit from Enterprises with
foreign investment or Foreign enterprises to domestic
enterprises which made outbound investment.
Expanding the focus from manufacturing operations to
intangible assets, financial transactions, corporateintangible assets, financial transactions, corporate
restructuring and special services.
Expanding the enforcement measures from transfer
pricing and APA to cost sharing arrangement (CAS),
Controlled Foreign Company (CFC) rule, Thin
Capitalization rule and General Tax Avoidance rule
(GAAR).
Talents development plan
Deployment of a national expert committee
Intensive training for experienced and newly
recruited transfer pricing auditor.
Thank youThank you

More Related Content

What's hot

International Taxation
International Taxation International Taxation
International Taxation
karomah95
 
The ICTD Government Revenue Dataset
The ICTD Government Revenue DatasetThe ICTD Government Revenue Dataset
The ICTD Government Revenue Dataset
International Centre for Tax and Development - ICTD
 
International Taxation - Tax Treaties, OECD, BEPS, MLI
International Taxation - Tax Treaties, OECD, BEPS, MLIInternational Taxation - Tax Treaties, OECD, BEPS, MLI
International Taxation - Tax Treaties, OECD, BEPS, MLI
Taxmann
 
Tax treaties and developing countries
Tax treaties and developing countriesTax treaties and developing countries
Tax treaties and developing countries
Martin Hearson
 
Research topics in international taxation
Research topics in international taxationResearch topics in international taxation
Research topics in international taxation
Martin Hearson
 
International Taxation Panel Presentation
International Taxation Panel PresentationInternational Taxation Panel Presentation
International Taxation Panel Presentation
International Centre for Tax and Development - ICTD
 
Tax Treaties: A Curse or a Blessing?
Tax Treaties: A Curse or a Blessing?Tax Treaties: A Curse or a Blessing?
Tax Treaties: A Curse or a Blessing?
International Centre for Tax and Development - ICTD
 
The way to Tax Multinational Corporations?
The way to Tax Multinational Corporations?The way to Tax Multinational Corporations?
The way to Tax Multinational Corporations?
Howie Thomas
 
International Tax Reform, Digitalization and Developing Economies
International Tax Reform, Digitalization and Developing EconomiesInternational Tax Reform, Digitalization and Developing Economies
International Tax Reform, Digitalization and Developing Economies
Martin Hearson
 
Tax Harmonisation in the East African Community
Tax Harmonisation in the East African CommunityTax Harmonisation in the East African Community
Tax Harmonisation in the East African Community
International Centre for Tax and Development - ICTD
 
ADIT Course - Advance Diploma in International Taxation
ADIT Course - Advance Diploma in International Taxation ADIT Course - Advance Diploma in International Taxation
ADIT Course - Advance Diploma in International Taxation
Taxmann
 
Strategic tax policy design in the face of the changing business environment ...
Strategic tax policy design in the face of the changing business environment ...Strategic tax policy design in the face of the changing business environment ...
Strategic tax policy design in the face of the changing business environment ...
OECD - Organisation for Economic Co-operation and Development
 
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
OECD - Organisation for Economic Co-operation and Development
 
Taxing the extractive sector in low income countries: A new database and rese...
Taxing the extractive sector in low income countries: A new database and rese...Taxing the extractive sector in low income countries: A new database and rese...
Taxing the extractive sector in low income countries: A new database and rese...
International Centre for Tax and Development - ICTD
 
International Tax Planning
International Tax PlanningInternational Tax Planning
International Tax Planning
Rowbotham & Company LLP
 
The Journey of Tax Statistics in South Africa
The Journey of Tax Statistics in South AfricaThe Journey of Tax Statistics in South Africa
The Journey of Tax Statistics in South Africa
International Centre for Tax and Development - ICTD
 
Financing Development
Financing DevelopmentFinancing Development
Financing Development
Lyla Latif
 
International Tax Planning as Viewed through the Eyes of BEPS
International Tax Planning as Viewed through the Eyes of BEPSInternational Tax Planning as Viewed through the Eyes of BEPS
International Tax Planning as Viewed through the Eyes of BEPS
Lewis Rice
 
Tax haven : Problems and Solutions
Tax haven : Problems and SolutionsTax haven : Problems and Solutions
Tax haven : Problems and Solutions
Bismay Mishra
 
Alternatives to taxation of corporate profits
Alternatives to taxation of corporate profitsAlternatives to taxation of corporate profits
Alternatives to taxation of corporate profits
International Centre for Tax and Development - ICTD
 

What's hot (20)

International Taxation
International Taxation International Taxation
International Taxation
 
The ICTD Government Revenue Dataset
The ICTD Government Revenue DatasetThe ICTD Government Revenue Dataset
The ICTD Government Revenue Dataset
 
International Taxation - Tax Treaties, OECD, BEPS, MLI
International Taxation - Tax Treaties, OECD, BEPS, MLIInternational Taxation - Tax Treaties, OECD, BEPS, MLI
International Taxation - Tax Treaties, OECD, BEPS, MLI
 
Tax treaties and developing countries
Tax treaties and developing countriesTax treaties and developing countries
Tax treaties and developing countries
 
Research topics in international taxation
Research topics in international taxationResearch topics in international taxation
Research topics in international taxation
 
International Taxation Panel Presentation
International Taxation Panel PresentationInternational Taxation Panel Presentation
International Taxation Panel Presentation
 
Tax Treaties: A Curse or a Blessing?
Tax Treaties: A Curse or a Blessing?Tax Treaties: A Curse or a Blessing?
Tax Treaties: A Curse or a Blessing?
 
The way to Tax Multinational Corporations?
The way to Tax Multinational Corporations?The way to Tax Multinational Corporations?
The way to Tax Multinational Corporations?
 
International Tax Reform, Digitalization and Developing Economies
International Tax Reform, Digitalization and Developing EconomiesInternational Tax Reform, Digitalization and Developing Economies
International Tax Reform, Digitalization and Developing Economies
 
Tax Harmonisation in the East African Community
Tax Harmonisation in the East African CommunityTax Harmonisation in the East African Community
Tax Harmonisation in the East African Community
 
ADIT Course - Advance Diploma in International Taxation
ADIT Course - Advance Diploma in International Taxation ADIT Course - Advance Diploma in International Taxation
ADIT Course - Advance Diploma in International Taxation
 
Strategic tax policy design in the face of the changing business environment ...
Strategic tax policy design in the face of the changing business environment ...Strategic tax policy design in the face of the changing business environment ...
Strategic tax policy design in the face of the changing business environment ...
 
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
 
Taxing the extractive sector in low income countries: A new database and rese...
Taxing the extractive sector in low income countries: A new database and rese...Taxing the extractive sector in low income countries: A new database and rese...
Taxing the extractive sector in low income countries: A new database and rese...
 
International Tax Planning
International Tax PlanningInternational Tax Planning
International Tax Planning
 
The Journey of Tax Statistics in South Africa
The Journey of Tax Statistics in South AfricaThe Journey of Tax Statistics in South Africa
The Journey of Tax Statistics in South Africa
 
Financing Development
Financing DevelopmentFinancing Development
Financing Development
 
International Tax Planning as Viewed through the Eyes of BEPS
International Tax Planning as Viewed through the Eyes of BEPSInternational Tax Planning as Viewed through the Eyes of BEPS
International Tax Planning as Viewed through the Eyes of BEPS
 
Tax haven : Problems and Solutions
Tax haven : Problems and SolutionsTax haven : Problems and Solutions
Tax haven : Problems and Solutions
 
Alternatives to taxation of corporate profits
Alternatives to taxation of corporate profitsAlternatives to taxation of corporate profits
Alternatives to taxation of corporate profits
 

Similar to China’s transfer pricing system

RSM India Publication - Transfer Pricing Regulations in India
RSM India Publication - Transfer Pricing Regulations in IndiaRSM India Publication - Transfer Pricing Regulations in India
RSM India Publication - Transfer Pricing Regulations in India
RSM India
 
Making Connections
Making ConnectionsMaking Connections
Making Connections
Tina Jordan
 
aptb_Shuchi
aptb_Shuchiaptb_Shuchi
aptb_Shuchi
Shuchi Ray
 
Addressing international corporate tax evasion an analysis of the oecd acti...
Addressing international corporate tax evasion   an analysis of the oecd acti...Addressing international corporate tax evasion   an analysis of the oecd acti...
Addressing international corporate tax evasion an analysis of the oecd acti...
Florian Marchal
 
Introduction to TransPrice Knowledge Alliance
Introduction to TransPrice Knowledge AllianceIntroduction to TransPrice Knowledge Alliance
Introduction to TransPrice Knowledge Alliance
Akshay KENKRE
 
Transfer Pricing - India and Global perspectives - 7 April 2017
Transfer Pricing - India and Global perspectives - 7 April 2017Transfer Pricing - India and Global perspectives - 7 April 2017
Transfer Pricing - India and Global perspectives - 7 April 2017
Hitesh Gajaria
 
Oracle E-Busienss Tax - Eight Keys to Success
Oracle E-Busienss Tax - Eight Keys to SuccessOracle E-Busienss Tax - Eight Keys to Success
Oracle E-Busienss Tax - Eight Keys to Success
Alex Fiteni
 
MTBiz June 2012
MTBiz June 2012MTBiz June 2012
MTBiz June 2012
Mutual Trust Bank Ltd.
 
Top Transfer Pricing Considerations for Manufacturers
Top Transfer Pricing Considerations for ManufacturersTop Transfer Pricing Considerations for Manufacturers
Top Transfer Pricing Considerations for Manufacturers
CBIZ, Inc.
 
Developing Capacity in Transfer Pricing
Developing Capacity in Transfer PricingDeveloping Capacity in Transfer Pricing
Developing Capacity in Transfer Pricing
OECDtax
 
DfID Project (R4P)
DfID Project (R4P)DfID Project (R4P)
DfID Project (R4P)
Julian Adey
 
GST and ecommerce - from traditional to marketplace consumption via the inernet
GST and ecommerce - from traditional to marketplace consumption via the inernetGST and ecommerce - from traditional to marketplace consumption via the inernet
GST and ecommerce - from traditional to marketplace consumption via the inernet
Raoul D'Cruz
 
Sox In Telecom Industry
Sox In Telecom IndustrySox In Telecom Industry
Sox In Telecom Industry
Mahesh Panchal
 
pwc-tax-function-of-the-future
pwc-tax-function-of-the-futurepwc-tax-function-of-the-future
pwc-tax-function-of-the-future
Joshua (Shlomo) Katz
 
S O X In Telecom Industry
S O X In  Telecom  IndustryS O X In  Telecom  Industry
S O X In Telecom Industry
ravindra sharma
 
Transfer Pricing in UAE.pdf
Transfer Pricing in UAE.pdfTransfer Pricing in UAE.pdf
Transfer Pricing in UAE.pdf
Fiyona Nourin
 
Evaluation methods for improved policy outcome
Evaluation methods for improved policy outcomeEvaluation methods for improved policy outcome
Evaluation methods for improved policy outcome
OECD Governance
 
China: Tax bulletin 2016 - Issue 1
China: Tax bulletin 2016 -  Issue 1China: Tax bulletin 2016 -  Issue 1
China: Tax bulletin 2016 - Issue 1
Alex Baulf
 
BEPS: Action #1 - Addressing the tax challenges of the digital economy
BEPS:  Action #1 - Addressing the tax challenges of the digital economyBEPS:  Action #1 - Addressing the tax challenges of the digital economy
BEPS: Action #1 - Addressing the tax challenges of the digital economy
Alex Baulf
 
Cost Audit- An Overview
Cost Audit- An OverviewCost Audit- An Overview
Cost Audit- An Overview
Nikita Jangid
 

Similar to China’s transfer pricing system (20)

RSM India Publication - Transfer Pricing Regulations in India
RSM India Publication - Transfer Pricing Regulations in IndiaRSM India Publication - Transfer Pricing Regulations in India
RSM India Publication - Transfer Pricing Regulations in India
 
Making Connections
Making ConnectionsMaking Connections
Making Connections
 
aptb_Shuchi
aptb_Shuchiaptb_Shuchi
aptb_Shuchi
 
Addressing international corporate tax evasion an analysis of the oecd acti...
Addressing international corporate tax evasion   an analysis of the oecd acti...Addressing international corporate tax evasion   an analysis of the oecd acti...
Addressing international corporate tax evasion an analysis of the oecd acti...
 
Introduction to TransPrice Knowledge Alliance
Introduction to TransPrice Knowledge AllianceIntroduction to TransPrice Knowledge Alliance
Introduction to TransPrice Knowledge Alliance
 
Transfer Pricing - India and Global perspectives - 7 April 2017
Transfer Pricing - India and Global perspectives - 7 April 2017Transfer Pricing - India and Global perspectives - 7 April 2017
Transfer Pricing - India and Global perspectives - 7 April 2017
 
Oracle E-Busienss Tax - Eight Keys to Success
Oracle E-Busienss Tax - Eight Keys to SuccessOracle E-Busienss Tax - Eight Keys to Success
Oracle E-Busienss Tax - Eight Keys to Success
 
MTBiz June 2012
MTBiz June 2012MTBiz June 2012
MTBiz June 2012
 
Top Transfer Pricing Considerations for Manufacturers
Top Transfer Pricing Considerations for ManufacturersTop Transfer Pricing Considerations for Manufacturers
Top Transfer Pricing Considerations for Manufacturers
 
Developing Capacity in Transfer Pricing
Developing Capacity in Transfer PricingDeveloping Capacity in Transfer Pricing
Developing Capacity in Transfer Pricing
 
DfID Project (R4P)
DfID Project (R4P)DfID Project (R4P)
DfID Project (R4P)
 
GST and ecommerce - from traditional to marketplace consumption via the inernet
GST and ecommerce - from traditional to marketplace consumption via the inernetGST and ecommerce - from traditional to marketplace consumption via the inernet
GST and ecommerce - from traditional to marketplace consumption via the inernet
 
Sox In Telecom Industry
Sox In Telecom IndustrySox In Telecom Industry
Sox In Telecom Industry
 
pwc-tax-function-of-the-future
pwc-tax-function-of-the-futurepwc-tax-function-of-the-future
pwc-tax-function-of-the-future
 
S O X In Telecom Industry
S O X In  Telecom  IndustryS O X In  Telecom  Industry
S O X In Telecom Industry
 
Transfer Pricing in UAE.pdf
Transfer Pricing in UAE.pdfTransfer Pricing in UAE.pdf
Transfer Pricing in UAE.pdf
 
Evaluation methods for improved policy outcome
Evaluation methods for improved policy outcomeEvaluation methods for improved policy outcome
Evaluation methods for improved policy outcome
 
China: Tax bulletin 2016 - Issue 1
China: Tax bulletin 2016 -  Issue 1China: Tax bulletin 2016 -  Issue 1
China: Tax bulletin 2016 - Issue 1
 
BEPS: Action #1 - Addressing the tax challenges of the digital economy
BEPS:  Action #1 - Addressing the tax challenges of the digital economyBEPS:  Action #1 - Addressing the tax challenges of the digital economy
BEPS: Action #1 - Addressing the tax challenges of the digital economy
 
Cost Audit- An Overview
Cost Audit- An OverviewCost Audit- An Overview
Cost Audit- An Overview
 

Recently uploaded

NIMA2024 | De toegevoegde waarde van DEI en ESG in campagnes | Nathalie Lam |...
NIMA2024 | De toegevoegde waarde van DEI en ESG in campagnes | Nathalie Lam |...NIMA2024 | De toegevoegde waarde van DEI en ESG in campagnes | Nathalie Lam |...
NIMA2024 | De toegevoegde waarde van DEI en ESG in campagnes | Nathalie Lam |...
BBPMedia1
 
Profiles of Iconic Fashion Personalities.pdf
Profiles of Iconic Fashion Personalities.pdfProfiles of Iconic Fashion Personalities.pdf
Profiles of Iconic Fashion Personalities.pdf
TTop Threads
 
欧洲杯投注-欧洲杯投注外围盘口-欧洲杯投注盘口app|【​网址​🎉ac22.net🎉​】
欧洲杯投注-欧洲杯投注外围盘口-欧洲杯投注盘口app|【​网址​🎉ac22.net🎉​】欧洲杯投注-欧洲杯投注外围盘口-欧洲杯投注盘口app|【​网址​🎉ac22.net🎉​】
欧洲杯投注-欧洲杯投注外围盘口-欧洲杯投注盘口app|【​网址​🎉ac22.net🎉​】
concepsionchomo153
 
DearbornMusic-KatherineJasperFullSailUni
DearbornMusic-KatherineJasperFullSailUniDearbornMusic-KatherineJasperFullSailUni
DearbornMusic-KatherineJasperFullSailUni
katiejasper96
 
The latest Heat Pump Manual from Newentide
The latest Heat Pump Manual from NewentideThe latest Heat Pump Manual from Newentide
The latest Heat Pump Manual from Newentide
JoeYangGreatMachiner
 
Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...
Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...
Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...
Niswey
 
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian MatkaDpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
➒➌➎➏➑➐➋➑➐➐Dpboss Matka Guessing Satta Matka Kalyan Chart Indian Matka
 
CULR Spring 2024 Journal.pdf testing for duke
CULR Spring 2024 Journal.pdf testing for dukeCULR Spring 2024 Journal.pdf testing for duke
CULR Spring 2024 Journal.pdf testing for duke
ZevinAttisha
 
PM Surya Ghar Muft Bijli Yojana: Online Application, Eligibility, Subsidies &...
PM Surya Ghar Muft Bijli Yojana: Online Application, Eligibility, Subsidies &...PM Surya Ghar Muft Bijli Yojana: Online Application, Eligibility, Subsidies &...
PM Surya Ghar Muft Bijli Yojana: Online Application, Eligibility, Subsidies &...
Ksquare Energy Pvt. Ltd.
 
Discover the Beauty and Functionality of The Expert Remodeling Service
Discover the Beauty and Functionality of The Expert Remodeling ServiceDiscover the Beauty and Functionality of The Expert Remodeling Service
Discover the Beauty and Functionality of The Expert Remodeling Service
obriengroupinc04
 
Part 2 Deep Dive: Navigating the 2024 Slowdown
Part 2 Deep Dive: Navigating the 2024 SlowdownPart 2 Deep Dive: Navigating the 2024 Slowdown
Part 2 Deep Dive: Navigating the 2024 Slowdown
jeffkluth1
 
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian MatkaDpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
dpbossdpboss69
 
Satta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel Chart
Satta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel ChartSatta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel Chart
Satta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel Chart
➒➌➎➏➑➐➋➑➐➐Dpboss Matka Guessing Satta Matka Kalyan Chart Indian Matka
 
Call8328958814 satta matka Kalyan result satta guessing
Call8328958814 satta matka Kalyan result satta guessingCall8328958814 satta matka Kalyan result satta guessing
Call8328958814 satta matka Kalyan result satta guessing
➑➌➋➑➒➎➑➑➊➍
 
Registered-Establishment-List-in-Uttarakhand-pdf.pdf
Registered-Establishment-List-in-Uttarakhand-pdf.pdfRegistered-Establishment-List-in-Uttarakhand-pdf.pdf
Registered-Establishment-List-in-Uttarakhand-pdf.pdf
dazzjoker
 
TIMES BPO: Business Plan For Startup Industry
TIMES BPO: Business Plan For Startup IndustryTIMES BPO: Business Plan For Startup Industry
TIMES BPO: Business Plan For Startup Industry
timesbpobusiness
 
2022 Vintage Roman Numerals Men Rings
2022 Vintage Roman  Numerals  Men  Rings2022 Vintage Roman  Numerals  Men  Rings
2022 Vintage Roman Numerals Men Rings
aragme
 
The Most Inspiring Entrepreneurs to Follow in 2024.pdf
The Most Inspiring Entrepreneurs to Follow in 2024.pdfThe Most Inspiring Entrepreneurs to Follow in 2024.pdf
The Most Inspiring Entrepreneurs to Follow in 2024.pdf
thesiliconleaders
 
Ellen Burstyn: From Detroit Dreamer to Hollywood Legend | CIO Women Magazine
Ellen Burstyn: From Detroit Dreamer to Hollywood Legend | CIO Women MagazineEllen Burstyn: From Detroit Dreamer to Hollywood Legend | CIO Women Magazine
Ellen Burstyn: From Detroit Dreamer to Hollywood Legend | CIO Women Magazine
CIOWomenMagazine
 
Lundin Gold Corporate Presentation - June 2024
Lundin Gold Corporate Presentation - June 2024Lundin Gold Corporate Presentation - June 2024
Lundin Gold Corporate Presentation - June 2024
Adnet Communications
 

Recently uploaded (20)

NIMA2024 | De toegevoegde waarde van DEI en ESG in campagnes | Nathalie Lam |...
NIMA2024 | De toegevoegde waarde van DEI en ESG in campagnes | Nathalie Lam |...NIMA2024 | De toegevoegde waarde van DEI en ESG in campagnes | Nathalie Lam |...
NIMA2024 | De toegevoegde waarde van DEI en ESG in campagnes | Nathalie Lam |...
 
Profiles of Iconic Fashion Personalities.pdf
Profiles of Iconic Fashion Personalities.pdfProfiles of Iconic Fashion Personalities.pdf
Profiles of Iconic Fashion Personalities.pdf
 
欧洲杯投注-欧洲杯投注外围盘口-欧洲杯投注盘口app|【​网址​🎉ac22.net🎉​】
欧洲杯投注-欧洲杯投注外围盘口-欧洲杯投注盘口app|【​网址​🎉ac22.net🎉​】欧洲杯投注-欧洲杯投注外围盘口-欧洲杯投注盘口app|【​网址​🎉ac22.net🎉​】
欧洲杯投注-欧洲杯投注外围盘口-欧洲杯投注盘口app|【​网址​🎉ac22.net🎉​】
 
DearbornMusic-KatherineJasperFullSailUni
DearbornMusic-KatherineJasperFullSailUniDearbornMusic-KatherineJasperFullSailUni
DearbornMusic-KatherineJasperFullSailUni
 
The latest Heat Pump Manual from Newentide
The latest Heat Pump Manual from NewentideThe latest Heat Pump Manual from Newentide
The latest Heat Pump Manual from Newentide
 
Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...
Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...
Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...
 
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian MatkaDpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
 
CULR Spring 2024 Journal.pdf testing for duke
CULR Spring 2024 Journal.pdf testing for dukeCULR Spring 2024 Journal.pdf testing for duke
CULR Spring 2024 Journal.pdf testing for duke
 
PM Surya Ghar Muft Bijli Yojana: Online Application, Eligibility, Subsidies &...
PM Surya Ghar Muft Bijli Yojana: Online Application, Eligibility, Subsidies &...PM Surya Ghar Muft Bijli Yojana: Online Application, Eligibility, Subsidies &...
PM Surya Ghar Muft Bijli Yojana: Online Application, Eligibility, Subsidies &...
 
Discover the Beauty and Functionality of The Expert Remodeling Service
Discover the Beauty and Functionality of The Expert Remodeling ServiceDiscover the Beauty and Functionality of The Expert Remodeling Service
Discover the Beauty and Functionality of The Expert Remodeling Service
 
Part 2 Deep Dive: Navigating the 2024 Slowdown
Part 2 Deep Dive: Navigating the 2024 SlowdownPart 2 Deep Dive: Navigating the 2024 Slowdown
Part 2 Deep Dive: Navigating the 2024 Slowdown
 
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian MatkaDpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
 
Satta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel Chart
Satta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel ChartSatta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel Chart
Satta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel Chart
 
Call8328958814 satta matka Kalyan result satta guessing
Call8328958814 satta matka Kalyan result satta guessingCall8328958814 satta matka Kalyan result satta guessing
Call8328958814 satta matka Kalyan result satta guessing
 
Registered-Establishment-List-in-Uttarakhand-pdf.pdf
Registered-Establishment-List-in-Uttarakhand-pdf.pdfRegistered-Establishment-List-in-Uttarakhand-pdf.pdf
Registered-Establishment-List-in-Uttarakhand-pdf.pdf
 
TIMES BPO: Business Plan For Startup Industry
TIMES BPO: Business Plan For Startup IndustryTIMES BPO: Business Plan For Startup Industry
TIMES BPO: Business Plan For Startup Industry
 
2022 Vintage Roman Numerals Men Rings
2022 Vintage Roman  Numerals  Men  Rings2022 Vintage Roman  Numerals  Men  Rings
2022 Vintage Roman Numerals Men Rings
 
The Most Inspiring Entrepreneurs to Follow in 2024.pdf
The Most Inspiring Entrepreneurs to Follow in 2024.pdfThe Most Inspiring Entrepreneurs to Follow in 2024.pdf
The Most Inspiring Entrepreneurs to Follow in 2024.pdf
 
Ellen Burstyn: From Detroit Dreamer to Hollywood Legend | CIO Women Magazine
Ellen Burstyn: From Detroit Dreamer to Hollywood Legend | CIO Women MagazineEllen Burstyn: From Detroit Dreamer to Hollywood Legend | CIO Women Magazine
Ellen Burstyn: From Detroit Dreamer to Hollywood Legend | CIO Women Magazine
 
Lundin Gold Corporate Presentation - June 2024
Lundin Gold Corporate Presentation - June 2024Lundin Gold Corporate Presentation - June 2024
Lundin Gold Corporate Presentation - June 2024
 

China’s transfer pricing system

  • 1. China’s transfer pricing system Zhang Ying State Administration of Taxation of People’s Republic of China
  • 2. Introduction With the integration of China’s economy into the world, more and more MNEs have entered into the Chinese market. At the same time, outbound investments byAt the same time, outbound investments by Chinese domestic company have been exponentially growing. Consequently, transfer pricing has been becoming a more and more pressing issue for Chinese tax authority.
  • 3. Outline The development of China’s transfer pricing legal framework The development of China’s transfer pricing practicepractice Special considerations on Chinese factors Development trend of China’s transfer pricing system
  • 4. The development of China’s transfer pricing legal system On July 1 1991, the Income Tax Law for Foreign Investment Enterprises and Foreign Enterprises ( known as “the FEIT Law”) and its implementing rules came into force. FEIT law adopts arm’s length principle as the basis for china’s transfer pricing system and tax authorities are authorized to adjusted a Foreign Investment Enterprise and Foreign Enterprise’s taxable income where it has been reduced as a result of non-arm’s length prices.
  • 5. The development of China’s transfer pricing legal system In 2007, China promulgated Corporate Income Tax law (“CIT”) and its implementing rules ,which have been in force since Jan 1, 2008. The new CIT mergers the Enterprise Income Tax Law (which previously applied to domesticLaw (which previously applied to domestic enterprises) and the Foreign Enterprise Income Tax Law (which previously applied to foreign enterprises).
  • 6. The development of China’s transfer pricing legal system In the new CIT law and its implementation rule, Chapter 6 “special tax adjustment” is aimed at regulating transfer pricing issues.aimed at regulating transfer pricing issues.
  • 7. The cornerstone of “special tax adjustment” Chapter Arm’s length principle The CIT Law provides the arm’s length principle standard as the guiding principle for related party transactions, andfor related party transactions, and empowers the tax authority to adjust a taxpayer’s taxable income if the taxpayers fails to comply with the arm’s length principle in dealing with related parties.
  • 8. The scope of “Special Tax Adjustment ”chapter Transfer pricing Advance pricing agreement Cost sharing arrangement Annual disclosure of related transactions and contemporaneous documentation Annual disclosure of related transactions and contemporaneous documentation Controlled foreign enterprises Thin capitalization General tax avoidance Special interest Levy
  • 9. Law Regulations Rulings The current legal framework Corporate Income Tax Law Tax collection and administration law Implementation rules of CIT Implementation rules of Tax Collection and Administration law Detailed rules and circulars for tax laws and regulations
  • 10. The development of China’s transfer pricing practice The first case was initiated in 1986 In the early years, transfer pricing audits are mainly focused on transfer of tangible good. In recent years, audit targets have beenIn recent years, audit targets have been broadened with transfer of intangible good, services, equity shares as well as tangible goods.
  • 11. Practical guidance for transfer pricing auditors Circular Guoshuifa [2009] No 2, “The implementation measures of Special Taxation Adjustment”, which is a detailed transfer pricing audit directive.audit directive.
  • 12. Investigation cases closed in recent years 2006 2007 2008 2009 2010 2011 Number of adjustments 177 174 152 167 178 207 adjustments Average adjustment (RMB millions) 3.84 5.75 8.16 12.51 14.5 11.8 Approximate total adjustment (RMB millions) 458 680 1,000 1,240 2,089 2,581
  • 13. APA annual report In December 2010, SAT issued the first ever annul report on APA in China for 2009, which initiated China’s annual APA reporting system.system.
  • 14. Number of APA Signed in recent years Year Unilateral APAs Bilateral APAs Multilateral APAs Total 2005 13 1 0 14 2006 10 0 0 10 2007 7 3 0 10 2008 6 1 0 7 2009 5 7 0 12 2010 4 4 0 8 Total 45 16 0 61
  • 15. The creation of “three in one ” anti-tax avoidance system In order to optimize the limited transfer pricing audit resources and achieved the goal of “both prevention and investigation”, SAT created a “three in one” anti-avoidance administrative“three in one” anti-avoidance administrative system which includes administration, service and investigation.
  • 16. Administration Rely on mechanism such as mandatory related-party transaction reporting, examination of contemporaneous documentation and follow- up measures to encourage taxpayer to perform a self-examination and self-correction of theira self-examination and self-correction of their transfer pricing policies. In order to minimize transfer pricing risks from the beginning.
  • 17. Service APA: provide certainty for taxpayers on its transfer pricing policy Map: create a channel for taxpayer to resolve disputes and minimize the risk of doubledisputes and minimize the risk of double taxation
  • 18. Investigation Strengthening investigation on MNS with huge amount of related transactions and unreasonable transfer pricing policies Joint investigationJoint investigation
  • 19. Standardized working procedure In order to run the transfer pricing administration in a more efficient and effective manner and with a high degree of consistency and transparency, all transfer pricing casesand transparency, all transfer pricing cases must be reported to the SAT for final review and assessment after they have been examined by different tax authorities at various levels.
  • 20. The weakness in applying OECD guideline Difficult to find perfect comparables due to the limited amount of Chinese listed companies in china and lack of information sharing mechanism among different administrationmechanism among different administration authorities and different regions. Difficult to make reasonable adjustment between Chinese companies and comparables located oversees.
  • 21. The ways to overcome the weakness Besides searching for desirable comparable for tested party, we tend to analyze the profit of the tested party in the context of whole supply chain.supply chain. By doing so, we want to rationalize the appropriateness of allocation of Chinese company’s profit in the whole supply chain of MNEs, unaffected by their related position.
  • 22. The ways to overcome the weakness Therefore, we need to focus on the value drives with unique Chinese characteristics which contributes to the residual profit of the whole supply chain.whole supply chain.
  • 23. Special consideration on Chinese factors Location saving Market premium Unpaid pollution
  • 24. Location Saving Lower cost of labor Better infrastructure and logisticsBetter infrastructure and logistics
  • 25. Location Saving More importantly, location saving is reflected in the unique contribution made by low-paid Chinese engineers and technicians who improve and refine the technology provided byimprove and refine the technology provided by the associated company and fostered incomparable intangibles which cater to the needs of customers.
  • 26. Market premium Huge population Exponential growth of Chinese middle classExponential growth of Chinese middle class
  • 27. Environmental cost High emission of pollution by MNC As a manufacturer, the cost of manufacturing isAs a manufacturer, the cost of manufacturing is more than what is recorded on the book.
  • 28. Taking the car manufacturing as an example 10, 33010, 33010, 33010, 330 13, 76013, 76013, 76013, 760 13, 70013, 70013, 70013, 700 10000100001000010000 12000120001200012000 14000140001400014000 t h o u s a n d c a r s t h o u s a n d c a r s t h o u s a n d c a r s t h o u s a n d c a r s Chi na paseenger car sal esChi na paseenger car sal esChi na paseenger car sal esChi na paseenger car sal es 754754754754 5, 6005, 6005, 6005, 600 0000 2000200020002000 4000400040004000 6000600060006000 8000800080008000 10000100001000010000 u n i t u n i t u n i t u n i t :::: t h o u s a n d c a r s t h o u s a n d c a r s t h o u s a n d c a r s t h o u s a n d c a r s 2001200120012001 2008200820082008 2009200920092009 2010201020102010 2011201120112011
  • 29. Are we simply contract manufacturers? In the MNEs’ supply chain, Chinese companies are usually characterized as contract manufactures. However, concerned with the unique factorsHowever, concerned with the unique factors with Chinese characteristics, should we be rewarded simply as contract manufacturer?
  • 30. Issues we concern Royal t i es pai d t o f or ei gn compani es( uni t : USmi l l i ons) 10, 300 11, 100 13, 000 14, 700 10, 000 12, 000 14, 000 16, 000 18, 000 6, 006 8, 200 10, 300 0 2, 000 4, 000 6, 000 8, 000 10, 000 2006 2007 2008 2009 2010 2011
  • 31. Issues we concern Is technology the most important value drivers of the profit of the company? Do we really need it? How much contribution does the technologyHow much contribution does the technology make to the profit of the supply chain? How about the local R&D value?
  • 32. Issues we concern Huge amount of meticulous fees paid by Chinese companies to their associated companies. If the Chinese companies are characterizedIf the Chinese companies are characterized only as contract manufactures, do we really need so many sophisticated services?
  • 33. Solution More frequent use of Profit split method or hybrid methods to test whether or not the result reflects the reasonable allocation of profit ofreflects the reasonable allocation of profit of whole supply chain
  • 34. Development trend of transfer pricing system Further refining the anti-avoidance legal framework
  • 35. Development trend of transfer pricing system Expanding the database Greater cooperation in the area of exchange of information with other administration authorities.authorities. Creation of a national database which allows for the sharing of tax filing information among tax authorities in different regions.
  • 36. Development trend of transfer pricing system More efforts will be put on prevention of tax avoidance. Engaging in more bilateral APAs to reduce the uncertainties for taxpayers.uncertainties for taxpayers. Encouraging the use of MAP to resolve transfer pricing controversy
  • 37. Development trend of transfer pricing system Expanding the target of audit from Enterprises with foreign investment or Foreign enterprises to domestic enterprises which made outbound investment. Expanding the focus from manufacturing operations to intangible assets, financial transactions, corporateintangible assets, financial transactions, corporate restructuring and special services. Expanding the enforcement measures from transfer pricing and APA to cost sharing arrangement (CAS), Controlled Foreign Company (CFC) rule, Thin Capitalization rule and General Tax Avoidance rule (GAAR).
  • 38. Talents development plan Deployment of a national expert committee Intensive training for experienced and newly recruited transfer pricing auditor.