China's streamlined corporate tax rules for multinational companies' transfer pricing, which will take effect on Sept 1, are expected to provide clarity and tax certainty on cross-border investments and business operations, as well as avoid double taxation during critical periods, experts said.
Sales of goods and services between a multinational parent company and its subsidiaries in different tax jurisdictions are done using transfer pricing.
Within the business group, profit is shifted from one jurisdiction to another sometimes to take advantage of a lower profit tax rate or other preferential tax treatments in a certain area.
China's new policy will simplify the procedure for unilateral advance pricing agreement－an arrangement whereby an enterprise applies in advance to negotiate and reach an agreement with the tax authority concerned in respect of certain criteria for transfer pricing.
Advance pricing arrangements can determine a set of criteria for transfer pricing over a fixed period of time.
Jeff Yuan, leader of PwC's Asia-Pacific transfer pricing services, said the new rules indicate the State Taxation Administration, China's tax authority, aims to provide better tax services to enterprises during times of economic uncertainties.
The transfer pricing tax regime was first introduced in China in 1991. It has been seen as a key part of the STA's anti-avoidance work agenda in recent years.
Enterprises with overseas business structure, cross-border party transactions, which they expect to go public, and those having high compliance with transfer pricing arrangements, will benefit from the new rules, Yuan said.
Usually, a Chinese enterprise having transactions with its overseas related parties needs to prepare the transfer pricing contemporaneous documentation and submit it to the tax authority annually.
Some special conditions are exceptional, like when the business has small amount of purchases and sales, or its related party transactions meet the criteria of advance pricing arrangements, experts said.
Owing to the complexity of transfer pricing, the tax authority with limited staff members may not be able to process all the applications for advance pricing arrangements in a short period.
This year, because of the simplified procedure, the tax authority will be able to deal with more applications that can help enterprises avoid double taxation during periods of economic uncertainties, said Yuan of PwC.
The STA released the new policy on its website on July 26, saying the tax authority would respond within 90 days after receiving a transfer pricing application.
This convenience is expected to attract more multinational corporations, especially financial services firms, to China, analysts said.
Han Guorong, head of the STA's Taxpayer Service Department, told China Daily this new policy is part of a campaign that started in February to promote reform of the tax administration, focusing on streamlining tax procedures to improve China's business climate.
The STA has declared 100 specific actions and 82 of them had been launched by the end of June, which improved tax services for a broad range of corporate taxpayers, Han said.
The tax administration released the latest national advance pricing arrangement report in October 2020. It indicated that by the end of 2019, 101 unilateral arrangements and 76 bilateral ones had been signed.
Thanks to its implementation in China for more than 20 years, advance pricing arrangements have played a great role in helping enterprises achieve tax certainty, avoid double taxation, and promote cross-border investment and trade, experts said.