Research On Anti-Tax Avoidance Of Transfer Pricing Within Multinational Companies

The current economic globalization has led to a phenomenal increase in the growth of multinational companies. There is no doubt that foreign direct investment by multinational companies can contribute significantly to a country's economic growth and development. However, in a multinational company, one segment charges another segment or other related parties at a higher or lower price for the transfer of goods or services, for the purposes of resource allocation, risk reduction and tax avoidance especially related with different tax rates of different countries. With shifting income from a high-tax-rate country to a low-tax-rate country, a multinational company can achieve strategic goals of overall low tax and high profit by transfer pricing. Actually, the incentive of multinational companies to fix transfer pricing to achieve their goals is well known to host countries in which the multinational companies operate. Transfer pricing policies for anti-tax avoidance in such host countries are usually formulated. So nowadays transfer pricing within multinational companies (both tax avoidance and anti-tax avoidance) is a topical issue in international tax legislation.As a rapidly developing country, China continues to open its doors to the outside world especially after its accession to the WTO. More and more multinational companies are investing in China, regarding it as a global manufacturing entity and a potential world market. In spite of the fact that the flow of FDI into China has risen significantly in recent years, many multinational companies in China have been declaring losses, leading to the popular saying in China, "loss on surface, profit in essence". This phenomenon has led not only to the loss of tax revenue in China, but also the incorrect image of China as an unprofitable investment prospect. This is caused by multinational companies shift profit through transfer pricing. So when more and more FDI are coming into China, we should not only consider the quantity, but also the quality. Although the law and rules related with transfer pricing have been firmly established in China, the anti-tax avoidance system which appears rudimentary compared to those western developed countries still needs furtherimprovement and finement. In the course of its application, many problems have been encountered. Some have argued that the regulation is too abstract to provide appropriate and operational guidelines for effective implementation. So the Chinese tax system is not perfect in practice. To keep in line with international practice, there is need to borrow from successful experience abroad.As in transfer pricing context, multinational companies and government appear like opponents in a game theory. They struggle and compete against each other indefinitely. While multinational companies make full use of transfer pricing manipulation to minimize their tax burden (tax avoidance); the host country government, on the other hand, formulates transfer pricing policies to control the situation and enhance its tax revenue (anti-tax avoidance). Each action influences and determines the other's behaviour. But the dynamics of the environment around them remain the same. There are some principal factors are important to both. In the paper, I first formulate a simplified framework which includes those elements that influence government transfer pricing policy-making. I also combine international accounting, financial analysis, financial management, asset evaluation and international taxation together to compare financial ratios and apply transfer pricing model and software to study the regulation.In detail, the focus of this paper on this issue is China, a big recipient of foreign direct investments in the world in recent years. Our study of transfer pricing policy trends and regulations is from the Chinese tax authority and government perspectives. First of all, we study and compare those main steams of transfer pricing regulations in the world such as America, OECD and so on. And during the process, we pay special attention to those variables in the above model such as economic development, international rules and adjusting methods. Then, based on a critical examination of the development of these policies and regulations in China, we analyze features of the current situation as well as related problems, including audit scope, adjusting method, documentation and penalty for non-compliance. The paper also identifies factors that influence the transfer pricing tax system in China, proposing future policy options and suggesting possible improvements of anti-tax avoidance in the system. They are new regulations for transfer pricing of intangibles, from arm's principle to arm'slength, better adjusting methods, database and cooperation and so on. The transfer pricing tax system in China almost ignores intangible assests. To meet the challenges posed by the economic development, we should capitalize R & D expense in self-developing intangible assests. Then we can use net present value to measure its value, taking it as the adjusting basis for transfer pricing. We should pick the Cost Contribution Agreement (CCA), a framework agreed among business enterprises to share the costs and risks of developing, producing or obtaining assets, services or rights. It is a technique for minimizing tax concerns from cross-border use of valuable intangibles. The ownership of intangibles being developed can be divided in considerarion for payment of an appropriate share of development costs, thus assuring members of a multinational group are not taxed on income generated by non-intangible rights. To apply those solutions and suggestions better, the paper also uses series of financial models and software to analyse case study.The findings of this study on China's experience should benefit other countries interested in policies aimed at introducing laws and regulations on transfer pricing practices of multinational companies operating in their countries.