With Beijing fast becoming more sophisticated on its transfer pricing enforcement, multinationals should add China to their list of countries that require careful and constant monitoring in relation to this issue.
With China now a full member of the World Trade Organisation (WTO), foreign investors will undoubtedly play a more active role in the Chinese market. As a consequence, crossborder inter-company transactions between foreign investors and their Chinese subsidiaries will become more common, and at the same time more complex. This trend, and the increasing aggression of the Chinese tax authorities on transfer pricing enforcement, means that it is an issue that foreign investors cannot afford to neglect.
In May 1998, the State Administration of Taxation (SAT) issued a tax circular (number 59) regarding the regulation of the taxation of transactions between associated enterprises. It is a very comprehensive ruling that marks a milestone in the history of China’s transfer pricing regime.