For many multinational companies with operations in China, the concept of transfer pricing is prominent and plays an important role in the tax planning process. Transfer pricing refers to prices set by affiliated enterprises when they sell goods and services. In practice, it is common for multinational companies to attempt to transfer profits from high-tax countries to low-tax countries, thus minimizing their tax payments. Such practices have attracted the attention of tax bureaus and governments all over the globe.

On the 29th of October 2020, the State Taxation Administration published the Advance Pricing Arrangement (APA) Annual Report (2019). An APA refers to an arrangement whereby an enterprise applies in advance to negotiate and reach an agreement with the tax authorities in respect of the transfer pricing methods and corresponding calculation methods to be applied to its related party transactions for future years, in accordance with the arm’s length principle. The report highlights that 2019 saw a record high number of agreed APAs, and reveals new trends in terms of industry types, transaction types, and transfer pricing methods involved in the concluded APA cases.

Certain businesses whose operations fall into the following categories may find applying for an APA beneficial, in order to manage their transfer pricing risks. For instance, businesses currently in the process of restructuring, businesses with a significant amount of related-party goods or services and intangible asset transactions, and businesses affected by the pandemic.

Competition for tax revenues among states around the world has intensified in 2020 amidst the volatility of the global economy, trade liberalization difficulties, and trade disruptions caused by the pandemic. Given these circumstances, taxpayers require a stable, clear, and fair tax environment to further support their cross-border investments. The continuous progress of the APA program in China showcases the commitment of tax authorities to improve the business environment and facilitate further trade and investment in China.

For multinational companies, it is compulsory to analyze and consider the appropriate tax and transfer pricing strategies in order to meet the requirements of all of the tax laws and regulations in China. At PHC Advisory, our experts can provide the necessary support to analyze and evaluate a company’s transfer pricing reports, mitigate transfer pricing and tax risks, and review and update the corresponding documentation. Please, feel free to contact us at info@phcadvisory.com to know more about us and how we can assist you.