China braces for tougher transfer pricing regulation
September, 05th 2006
For companies which wince at the effort needed to deal with domestic tax authorities, here is food for thought. Doing business in China could be equally challenging when it comes to taxation issues like transfer pricing.
China is expected to come out with a regulation on transfer pricing in the next two months, which is likely to increase the scale of documentation needed by the assessee companies. As per the proposed Chinese regulations, companies will have to file details of international transactions with associated enterprises.
They would also be required to substantiate the arms length character of their transactions by way of transfer pricing documentation, as that would be a necessity if the regulations come into effect. Shyamal Mukherjee, executive director, PricewaterhouseCoopers, said: The real concern is how tax authorities would look at the regulation from implementation point of view in different jurisdictions. The implementation of the regulation would be carried out by the provincial authorities.
In fact, since provincial authorities are the main implementing agencies, companies are already facing the heat due to differences on revenue matters relating to what is laid at the federal level and the actual practice at the provincial level, according to Raghav Hari, manager, international tax services, Ernst & Young. It is this fact which is the main worry in the proposed regulation on transfer pricing, he said.
Arms length pricing is a tax concept that describes a relationship in which the transacting parties ensure fair pricing of goods and services that are bought and sold. They do not use any proximity to each other, as a subsidiary or branch, to offer unfair advantage to each other.
The new regulation would entail that companies give details of corporate structure, market conditions, key players, financial arrangements, functional and risk analysis, method used for selecting arms length character and most importantly comparability analysis to support the inter-company pricing, Mr Hari said. The companies may be asked to provide documents of their business for the past three years. This may be onerous or burdensome for companies though large MNCs could be able to manage it, he said.
Currently companies have to give only a declaration on transfer pricing along with their income tax return.
The new regulation, which would apply for 06, will have two components new lodgement requirement and new guidance of full documentation.
Under the lodgement requirement, companies will be required to file a transfer pricing declaration with tax returns and additional requirement will have to be given by April 30 or later. Under the new guidance, the authorities can seek additional information after the audit. This would apply for both international as well as domestic party related transaction.