Transfer pricing is the arranged price in trades between affiliated parties. It is often used in commercial transactions to transfer profits and reduce tax burdens.

The tax systems and rates differ from country to country. This makes it possible for multinational corporations to choose the best place to invest. Then they are able to arrange the transfer pricing within the group company to adjust the profit between each companies. Transfer pricing is a very popular method used in tax planning. However, transfer pricing will directly reduce the tax revenue of the host country. It is estimated that in later 90s’, the multinational companies in China have prevented tax more than RMB 30,000 million each year by this way. That equals to 1/30 of China’s yearly financial revenue. For this reason, transfer pricing has been focused intensively during inspections by tax administrations. China has also put more effort to encounter transfer pricing.

China’s tax legislation provides, transactions conducted between enterprises in China and their affiliated companies should be priced according to those between independent companies. Otherwise, the tax administration may determine the evaded tax and thus force them back. The average extension to adjust the tax amount connected to transfer pricing could extends 3~10 years.

If transfer pricing is recognized by tax administration, it may adjust the price in this transaction. However, the tax administration can’t apply the arrearage and fine until the involved company refuse to makeup all tax prevented after administration’s requirement.