Delta Faucet (China) Co., Ltd. Transfer Pricing Benchmark Study

Due to the difference of tax law and tax rates among different countries and areas, the same amount taxable income will generate different amount of tax payable. To maximize the profit, application of tax planning among related companies to transfer profit to countries and areas with lower tax rate has become one major method of tax avoidance for MNC's. However, to protect fiscal income, tax authorities of many countries has also enacted many ordinances to tackle tax evasion. The tax authority of PRC, after more than a decade of research, has formally established transfer pricing tax system, with reference to the international practices. It's become a new subject of tax planning for MNC to balance the risk and reward of transfer pricing under such new system. This thesis will refer to the latest domestic and international theories of transfer pricing, and put them into practice in the case study, tax planning for Delta Faucet (China) Co., Ltd. This will serve as a demonstration of connection between theory and application.This thesis will first introduce the definition, characteristics, rationales of transfer pricing, the international transfer pricing methods for tax avoidance, methods against tax evasion, as well as the current regulations in China. Introduction on theory will help explain why tax authorities of various countries are so sensitive to related-party transactions.After that, we will move from theory to practice. Using the related-party transactions of Delta China over 2004 to 2006 as examples, we will search the basis for transfer pricing, analyze the business nature, financial status and profitability of the company. Through comparison of transfer pricing benchmark, we will assess whether the prices satisfy with the arm's length principle and the impacts on the risk of tax adjustment. The final conclusion is that transfer pricing issue is inevitable. However, the ignorance of companies will put themselves under great risk. Companies should research on the transfer pricing benchmark, discover and prevent the related tax risk, take preemptive action and adjust their pricing strategies to minimize the risks.