Transfer Pricing: UN Practical Manual – China
35 Pages Posted: 7 Jan 2014 Last revised: 8 Jan 2014
Date Written: January 6, 2014
Any contemporary Chinese transfer pricing assessment needs to consider the United Nation (UN) Practical Manual on Transfer Pricing for Developing Countries released in May 2013. In particular, Chapter 10 discusses Country Practices and presents China’s most up to date transfer pricing policy statement.
China is not an Organization for Economic Cooperation and Development (OECD) member nor has it formally adopted the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Chapter 10 makes it very clear that China is charting a different transfer pricing course in at least nine important areas. China believes that: 1. significant comparability adjustments are needed when comparable sets are drawn from developed countries; 2. the transactional net margin (TNMM) is considered overused and inaccurate; 3. location savings must be reflected in the costs; 4. toll manufacturers will be converted into contract manufacturers; 5. limited risk distributor status is denied for brand building distributors; 6. market premiums must be reflected in Chinese profits; 7. tax haven based IP ownership can be “looked through” or denied; 8. cost-plus methodology is rejected for “high and new technology status” (HNTS) entities; 9. royalty adjustments over time are necessary.
The Chinese approach to transfer pricing or at least the approach presented in the Practical Manual uses familiar OECD terminology but it places a very different emphasis on some basic concepts in the OECD Guidelines.
Thus, the Chinese market economics strengthens the State Administration of Taxation’s hand and encourages more forceful transfer pricing policies. This is the case even though these policies diverge from OECD norms.
This paper considers the nine major areas where the Chinese position in the UN Practical Manual differs from positions in the OECD Guidelines.
Keywords: Transfer pricing, UN Practical Manual, Developing countries, OECD, China, Comparability, TNMM, Location saving, High & New Technology Status, Toll manufacturer, LSA, Location Specific Advantages
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