The Chinese government regulates transfer pricing practices of multinational companies through multiple departments and regulations, mainly including the following aspects:
Tax Regulation:
Chinese tax authorities strictly monitor the transfer pricing practices of multinational companies. Multinational enterprises need to prepare contemporaneous documentation to prove that their related-party transactions comply with the arm's length principle. Tax authorities may review companies' transfer pricing policies and require tax adjustments.
Customs Regulation:
Customs is also an important department for transfer pricing regulation. In 2018, China's General Administration of Customs issued a new version of the "Customs Valuation and Transfer Pricing Guidelines," strengthening the supervision of dutiable value of imported goods. Customs may question whether the transfer pricing policies between related companies affect the transaction price of imported goods and may require companies to make valuation adjustments and pay additional duties.
Dual Regulation:
Multinational companies in China often face dual regulation from tax and customs authorities. This "sandwiched" regulation requires companies to consider both tax and customs requirements when formulating transfer pricing policies to ensure compliance.
Comprehensive Regulatory Environment:
In addition to tax and customs, China's regulatory environment involves other aspects such as foreign exchange policies. It is recommended that companies comprehensively consider various regulatory requirements when making transfer pricing self-adjustments to ensure smooth implementation.
Risk Prevention:
Facing increasingly stringent regulations, multinational companies need to take proactive risk prevention measures. This includes closely monitoring changes in national regulatory policies, industry development trends, and paying attention to risks brought by fluctuations in their own profits and import prices. Companies should balance the risks in preparing contemporaneous transfer pricing documentation, taking into account various factors.
Compliance Strategy:
To "achieve stability amid complexity" in the complex regulatory environment, multinational companies need to develop comprehensive compliance strategies. This may include regularly reviewing and updating transfer pricing policies to ensure they comply with the latest regulatory requirements, and seeking a balance between tax and customs requirements to avoid violating one set of regulations while complying with another.
In summary, China's regulation of transfer pricing for multinational companies is comprehensive and multi-layered, involving multiple departments such as tax and customs. Multinational companies need to fully understand and comply with relevant regulations, formulate reasonable transfer pricing policies, and be well-prepared for risk prevention to cope with the increasingly stringent regulatory environment.
