The Chinese Approach to Transfer Pricing: Problems Faced and Paths to Improvement

Abstract

With the increasing integration of the Chinese market into the global economy, China’s tax policy on transfer pricing and its tax administration influence extremely large numbers of cross-border transactions between China and other states. China has suffered heavy revenue loss from transfer pricing manipulation. Since 2008, Chinese tax authorities have paid special attention to such tax avoidance methods. By examining the Chinese approach to transfer pricing based on publicly available information, this article analyses the reasons for the perceived aggressiveness of Chinese tax authorities in dealing with transfer pricing issues, and the inconsistency between the statutory endorsement of the arm’s length principle and the approach adopted in practice by tax authorities. Measures to improve the efficiency of the administration of transfer pricing in China are proposed.

Keywords: Arm’s length transactions, China, Foreign investment, Tax administration, Tax avoidance, Transfer pricing