• Service: Tax, Global Transfer Pricing Services (GTPS)
  • Type: Business and industry issue, Video
  • Date: 5/1/2012
  • Length: 06:58 Minutes


Cheng Chi

Cheng Chi

Head of Transfer Pricing

+86 (21) 2212 3433

Update on transfer pricing in China and Hong Kong 

Chi Cheng, Head of Transfer Pricing, KPMG in China & Hong Kong::

Hi, my name is Chi Cheng and I'm the head of transfer pricing for KPMG in China and Hong Kong.

What is happening in transfer pricing in China?

China has a long history in transfer pricing. They did their first case back in 1986, but not until 2005, I think, all the transfer pricing enforcement tended to be quite random. Since 2005 the Chinese authorities started to, sort of, formalize their transfer pricing administration by issuing a new regulation back then which was also revamped back in 2008. So there was a lot happening in the recent years. And there was also a little bit of evolution going on throughout that period since 2005 where initially you will find the Chinese authorities, sort of, have more focus on doing transfer pricing investigation, making sure catch the bad guys and try to increase the adjustment amount so that the – any taxes which otherwise would be evaded through transfer pricing will be collected.

And I can certainly see that trend still continues. There are a lot of enforcement efforts focusing on transfer pricing investigation. But since 2009 and probably more effectively in 2010, tax authority start to talk about that their transfer pricing administration is not just investigation focused, but rather they're also looking to other two areas which are equally important, or sometimes even more important, which is the transfer pricing administration management and the other is the taxpayer service.

Whereby transfer pricing management, they're talking about – they're looking to taxpayer's profile, try to preempt any transfer pricing issues from happening and for taxpayer services, where they're really talking about primarily providing APA as an alternative dispute resolution mechanism where taxpayers can engage in negotiations with the tax authorities. So things are happening around these three themes and I think the predominant concept in the most recent year, actually, now evolve around the transfer pricing management where they try to identify taxpayers with transfer pricing issues before the problem becomes too tremendous.

Other key themes?

One of the key themes and oftentimes to the strong interest of taxpayers in China is our APA program, because as we said a lot, the transfer pricing risk in China is relatively high. There is a relatively aggressive taxing authority so a lot of taxpayers have been thinking of how to attain some degree of certainty and the APA so far is the only mechanism that is available for taxpayers to officially obtain some degree of certainty with regard to their transfer pricing arrangement in China.

The program has developed along the years and China has recently just released its APA report for 2010. And they practice that, they follow that in a couple of other countries to publicize the data on APA program. Some interesting things to note, one is initially the program take off with a lot of emphasis on unilateral APA, then gradually it shifted towards bilateral APAs. Now bilateral APAs in the recent two years have been the primary focus of the APA program. But, on the other hand, it is also worth noting that the total number for APA that is being concluded as well as the processing time of the APA generally has taken longer for the taxpayer to conclude an APA. So it certainly still indicated that it's an important and a useful program, but it requires a lot of attention and a lot of resources from the taxpayers to make sure that they can be successful in attaining an APA against a background that the taxing authorities are short of resources and they are a lot more cautious compared to before in concluding the APA's with taxpayers.

What is the State Administration of Taxation's transfer pricing risk index system?

Well, that's again another very new item and the top one on the agenda for Chinese authorities for 2012. And the idea is that now that China has enforced transfer pricing documentation and disclosure requirements for three years, they have a lot of data, which those that have been put into an electronized system. The indexing system, to be honest, it is just a data mining software that they are looking at. They hope that once they develop this software being deployed they will be able to quickly identify taxpayers with a lower margin and they will be able to, sort of, make a comparison across region, across industry, across the same industry, but for different regions. So there will be a lot of data that allow the taxing authorities using this program to analyze and to identify companies which either they have transfer pricing issues or to serve as the benchmarks for taxing authorities to have a better understanding what should be the operating margin or other profit level that the taxpayer needs to attain.

How does the by "region by industry" approach work?

That's actually an old concept, but just Chinese authority felt that they haven't truly been implementing them for the past few years. Now they are picking up. They still believe the merits of a lot of group companies have multiple operations in China have the same term with regard to transfer pricing. And sometimes the knowledge that they gain through investigating one company within the group or one company within the industry can be leveraged and be shared across and, therefore, they can use their limited resource, but have coverage of a big section – cross section of taxpayers either within the same group or within the same industry.

Chi Cheng, Head of Transfer Pricing for KPMG in China and Hong Kong provides an in-depth look at the key trends and issues in transfer pricing in China and Hong Kong.

More about APA in China

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