Transfer pricing: what developing countries are doing, China edition

china-flagLast December Krishen Mehta wrote us a longish article entitled Developing Countries and Tax – Ten Ways Forward. It outlines a series of measures that developing countries can consider as they seek to curb tax cheating by multinational corporations. This blog is really just a pointer to an article in the publication China Briefing entitled In Curbing Transfer Pricing, China Moves Beyond OECD Guidelines.

Transfer pricing is, as tax expert Lee Sheppard put it, “the leading edge of what is wrong with international tax,” and it’s a great concern for all countries. Read more about it here.

It complements Krishen Mehta’s article nicely, and outlines some concrete and robust steps that China is taking:

  1. Services such as control, management or supervision that are rendered for the purpose of protecting the interests of the company’s shareholders. As the China-based entity is not the beneficiary of these services, these transactions do not comply with the arm’s length principle and are therefore not deductible
  2. Duplicate services: e.g. where the Chinese taxpayer has purchased or carried out services by itself, yet also pays an overseas affiliate for them.
  3. Services that are passive or ancillary in nature – i.e., there is no specific service that is carried out by the overseas related party specifically for the Chinese enterprise
  4. Services that do not bring about direct or indirect economic benefit to the enterprise
  5. Services that are irrelevant to the risks or business that the Chinese taxpayers carries out
  6. Services that have already been compensated for in other transactions

This is just one section from the longer article. We will now update Krishen’s article with reference to this.


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