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China Transfer Pricing Laws, Because They Matter
Last week I wrote an article for Forbes, entitled, China’s Tax Authorities Want You. The theme of that article was how China’s slowing economy is causing the Chinese government to step up its tax collection efforts against foreign companies with off-the-grid “employees” in China. China is also stepping up its tax collections on transactions that implicate transfer pricing.
China transfer pricing. Because it matters.
Wikipedia nicely defines transfer pricing as follows:
Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods is the transfer price. Legal entities considered under the control of a single corporation include branches and companies that are wholly or majority owned ultimately by the parent corporation. Certain jurisdictions consider entities to be under common control if they share family members on their boards of directors. It can be used as a profit allocation method to attribute a multinational corporation’s net profit (or loss) before tax to countries where it does business. Transfer pricing results in the setting of prices among divisions within an enterprise.
Transfer pricing comes into play in China for transactions between related companies. The definition of what constitutes a related company in China is a company with 25% direct or indirect ownership, or control. This applies whether one party owns another or two parties are owned by a third party. Other criteria including loans, control of management, or other indicia of control can also be taken into account.
Transfer Pricing Matters.
I could write pages and pages as to why it is imperative that you deal with transfer pricing and why these issues are so much at the fore in China. But I won’t. What I will tell you is that China has over the last year or so been accelerating its tax reviews relating to transfer pricing. China is striving to increase its tax revenues (that’s a given) and this is a great way to tap foreigners for more money. And get this: all payments made by your Chinese company to a related company may be subject to a tax adjustment up to ten years after the payment has been made. And it will be incumbent upon your Chinese company to provide relevant documentation including the written contracts between the Chinese company and its related companies overseas.
China wants to reduce the transferring of funds outside China disguised as payments for services. If your Chinese entity is paying your company in the United States $200,000 as a service fee, that $200,000 payment may well be a deductible expense. But if that $200,000 is characterized as a repatriation of profits, that repatriation is a taxable event. Needless to say, the Chinese government wants more taxable events and fewer deductions and if your China entity cannot probably document what it has done it will likely end up adding RMB to the China’s taxable event column.
China’s tax authorities have made clear that they are looking for the following sorts of payments for taxing:
- Payments to the overseas company for services that are never provided.
- Payments to the overseas company for services not really required by the Chinese company.
- Royalty payments to the overseas company for intangible assets (think trade secrets, patents, trademarks, copyrights, etc.) to which the overseas company did not really contribute.
What To Do About China Transfer Pricing.
Again, I could write pages and pages on this. But I won’t. I will just say that if you have or will have a related Chinese entity you should look carefully at the transactions between your foreign entity and your Chinese entity. At minimum, you should be sure that the transactions are valid, well documented, and based on justifiable market pricing. If you do not have a written agreement between your China entity and your overseas entity clearly setting forth the terms of all transactions between those two entities, you need to get one. Now.
The post China Transfer Pricing Laws, Because They Matter appeared first on China Law Blog.
We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.
Source: http://www.chinalawblog.com/2015/06/china-transfer-pricing-laws-because-they-matter.html
