With many foreign enterprises in China consistently reporting low profitability, China’s tax authorities have issued a variety of rules to ensure that transfer pricing adjustments are a major source of tax revenue for the future.

On 8 January 2009, in order to provide further administrative guidance over Chapter 6 of the new Enterprises Income Tax (“EIT”) Law and its Implementation Rules, the State Administration of Taxation (“SAT”) published a new set of comprehensive transfer pricing regulations entitled Guo Shui Fa [2009] No.2, which has formalized the long-awaited contemporaneous transfer pricing documentation requirements in China. Enterprises in China are strongly recommended to develop an action plan, and implement appropriate systems, to ensure timely compliance with the new rules. The EIT Law provides significant incentives, via reduced interest penalties, where taxpayers properly comply with the documentation requirements under the new regime.

Transfer pricing issues will have a significant impact upon every step of the supply chain of a company’s operations in China. It is highly important that your finance and accounting departments have an appropriate understanding of the obligations and specific documentation requirements under the new regime.

How we can assist you navigate this new environment?
Hwuason Transfer Pricing Services can help you with all aspects of transfer pricing in China, including documenting your transfer pricing policies to minimize your tax risk. A comprehensive package of services is offered by our professionals, including the following:

Transfer Pricing Risk Assessment
In order to avoid any nasty transfer pricing surprises we can help you review your inter-company transactions and assist with adjusting them, including your pricing, to ensure compliance. Our experience professionals have a full understanding of the risks that you face and the best manner to minimize such risks in way that is most suitable for your business. We can give you clear answers as to whether your pricing is consistent with the arms length standards required.

Structuring and Planning
Transfer pricing rules create risks for the unwary. However, the solution to reducing this risk is not to stop the use of all related party transaction entirely. Use of related party transactions can provide significant operational and tax benefits for your company. Accordingly, it is important that tax and operation efficiency be a prime consideration for your transfer pricing policies. We can help you create a transfer pricing policy that achieves an appropriate balance between minimizing risk and achieving tax efficiency. Our services in this area includes working your supply chain management team to create a system that best works for you.

Transfer Pricing and Related Party Documentation
China now has comprehensive transfer pricing and related party documentation requirements which are required to be complied with irrespective of whether your related party transactions are at arms length, and in fact complying with such requirements may help to reduce the consequences of failing to comply with the arms length principle. Accordingly, it is important that all companies ensure that their transfer pricing documentation satisfies the new legal requirements. These requirements include both contemporaneous documentation and annual tax filings. The information that must be documented is quite detailed and requires a considerable amount of expertise to satisfy the tax authorizes requirements. Our transfer pricing professionals have the requisite experience to assist you with preparing the appropriate documentation to ensure that no future problems will arise.

Advance Pricing Arrangements
An Advance Pricing Arrangements (APA) is an advance agreement between the taxpayer and the authorities as to the appropriate pricing methodology to be utilized by the taxpayer. China’s transfer pricing rules allow for APAs. APA’s enable taxpayers to greatly reduce their transfer pricing risk and the threat of future challenges by the authorities. Our professionals can help you to prepare your APA and liaise with the authorities to ensure a mutually agreeable position.We can also help you to determine whether an appropriate for your company. The type of information that must be disclosed when arranging an APA means that they will not always be suitable for all clients.

Cost Sharing Arrangements
A Cost Sharing Arrangement (CSA) is a process to apportion the costs and the risks of the development of intangible assets. Each party will be responsible for a share of the costs of the development of the asset and will be entitled to fully exploit the result of the development. CSAs can, because of particular features of the Chinese tax system, help to reduce the risks of double taxation and can also provide a less risky form of financing of research and development. Further, and importantly, The costs allocated to an enterprise under a CSA signed with its associated party will not be tax deductible when the CSA does not have a bona fide commercial purpose or economic substance and the CSA does not comply with the arm's length principle. Our professionals can assist you to prepare a CSA through R&D analysis and negotiation with tax authority to minimize your tax risks.

Dispute Resolution
Unfortunately there may be a time where your company is faced with a transfer pricing audit by the tax authorities, particularly in light of the recent aggressive attitude towards this issue, in which case it is critical that you have appropriate strategy in place to respond to such an audit. Our dispute resolution services can help you on two levels; designing an appropriate system prior to being audited and responding to a particular audit by the authorities.

For more information on how Hwuason's Transfer Pricing team can assist, please contact:  china@hwuason.com