PricewaterhouseCoopers said Chinese tax authorities would be putting a closer watch on Hong Kong and foreign firms operating on the mainland with a new information-sharing agreement with Hong Kong's Inland Revenue department about to go into force. China has long suspected Hong Kong companies of engineering losses at their mainland affiliates while reporting profits in Hong Kong where the tax hit is lighter. The mechanism of choice, known as transfer pricing, involves parent companies overcharging mainland subsidiaries for goods and services. Mainland tax authorities now require companies to itemize prices on transactions between affiliates in advance. PwC told the South China Morning Post that companies were best advised to sign APAs as they are known, or advanced pricing agreements, with local mainland tax authorities to avoid trouble.
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