Basic introduction of Transfer Pricing policy
In mainland China
By Victor Tu
Do you know which country is the most investors from in mainland China? America? UK? Germany? Or Japan? The above answers are all wrong. The right one is Hong Kong. Why? Because most foreign investors are not familiar with the mainland China but Hong Kong they are, so they decide to use Hong Kong as an investing tunnel. In meanwhile, an investor from Hong Kong does have some benefits from this identification in a specific situation (more details see the article in May 2014). However, under this structure, the transfer pricing issues arise easily, because it triggers the attention by the tax bureau for related parties’ transactions. They will double check if the company is manipulating the financial results. i.e. shifting the profits from Chinese company to Hong Kong company due to lower corporate income tax in Hong Kong (16.5% or exempt ).
When the tax bureau takes the special tax adjustment actions (Transfer Pricing investigation), there are several rules you have to know.
l According to the tax rules of China, a company must disclose its all related parties and transactions per year when it files the CIT returns annually. (Prior to May 31 every year, in some cases, the local tax bureau will only require specific companies to prepare the detailed transactions between related parties.)
l If a company sells products to its related parties amounting over RMB 200 million (USD 33m) or does non-products selling business (i.e. interests, royalties, service, etc. ) with related parties, which amount is more than RMB 40 million (USD 6.6m) , the company has to prepare the Contemporaneous Documentation, which includes a bunch of documents to demonstrate your all related parties, i.e. group organization chart, the group accounts, all industries information, details of related parties transactions and pricing, different parties function analysis ,etc.
l In some cases, Even though the company doesn’t fulfill the above threshold (products or non-product sale ), the tax bureau still has the right to conduct the transfer pricing audit on it , if it has following problems:
1. Related parties’ transactions account for significant of the total sales.
2. Long-term losses or unstable profits.
3. The net profit margin is far lower compared to similar companies.
4. Do business with the related parties from tax heaven countries.
In a word, to avoid the transfer pricing audit or deal with the audit appropriately from tax bureau, a company must prepare the qualifying documents in advance or advise the experienced tax and accounting professionals on time.
Keywords: Ningbo accounting, Ningbo Auditor, Ningbo accountants, Ningbo CPA
Victor & Truman，CPAs 宁波纬度会计师事务所（普通合伙）