Transfer pricing means to decide the amount charged by one segment of an organization for a product or service that it supplies to another segment of the same organization, that is, the act of pricing on the transaction between the related parties. The amount charged is called transfer price. During auditing and adjusting the Transfer Pricing, the Tax Authorities mainly focus on the “Reasonable Profit” in the transaction. It is a Tax Authorities’s responsibility to supervise the Transfer Pricing in the transaction among affiliated enterprises in China.

We suggest that our client should refer to the following factor to decide a Transfer Pricing:
(1) The average Profit Margin from industrial products;
(2) The Profit Margin of the “Like Products” approved by the Custom Authorities;
(3) The Profit Margin of the “Like Products” or “Product Similar” in world.

In addition, the method of Negotiated Pricing has been adopted by Chinese laws and administrative regulations. So, our client may also select this method to decide a Transfer Pricing.

The content of the relevant law & regulation:

1. Law

Law of the People’s Republic of China Concerning the Administration of Tax Collection (2001.04.28)

Income Tax Law of the People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises (1991.04.09)

Enterprise Income Tax Law of the People’s Republic of China (2007.03.16)

2. Administrative Regulations

Detailed Rules for the Implementation of the Law of the People's Republic of China on the Administration of Tax Collection (2002.09.07)

Detailed Rules for the Implementation of the Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises (1991.06.30)

3. Administrative Rules

Notice of the State Administration of Taxation on the Tax Administration of Transfer Pricing of Business Transactions among Affiliated Enterprises (2006.09.28)

Circular of the State Administration of Taxation on Clarifying the Force of the Relevant Documents on Tax Administration Regarding the Business Operations among Affiliated Enterprises (2006.08.23)

Circular of the State Administration of Taxation on the Issue of Capital Adjustment in the Taxation Administration of Transfer Pricing (2005.07.28)

Notice of the State Administration of Taxation on Distributing the (Trial) Implementing Rules for Negotiated Pricing for the Transactions among Associated Enterprises (2004.09.03)

Official Reply of the State Administration of Taxation concerning the Adjustment of the Business Transactions between Enterprises and their Related Enterprises (2003.11.13)

The Notice of Revision to the Rules for the Business Transaction among the Related Enterprises (2004.10.22)

...... etc.

4. Relevant Tax Treaties