Choosing The Best Method When Applying For Transfer Pricing

As the globalization proceeds, many problems among the countries happened. Especially the growth of multinational enterprises presents complex taxation issues for both the administrations and multinational enterprises. The international aspects of Transfer Pricing issues involve more than one tax jurisdiction and any adjustment to the transfer price in one jurisdiction implies that a corresponding change in another jurisdiction in order to avoid the risk of double taxation on cross-border transactions.Therefore, the purpose of this thesis is to minimize tax risks when Korean companies which invested in China adopt the transfer pricing method based on arm's length price. That's because many Korean Companies has been invested in China and had a lot of transactions with their subsidiaries. Moreover, the State administration of Taxation is having a more interest on the transfer pricing.Generally, before we do transfer pricing analysis, we must review functional analysis to increase the degree of comparability. But in reality, we can't get enough information to analyze the functional analysis because the patterns of business of companies are very different. Therefore, this report analyzed the functional analysis with open data instead of analyzing each companies' function.Application of the arm's length principle is generally based on a comparison of the conditions in a controlled transaction with the conditions in transactions between independent enterprises. But we can say that the traditional transaction methods require high degree of comparability and transactional profit methods require low degree of comparability. So, when we determine the application of transfer pricing method, we can recommend that the traditional transaction methods cannot be used easily.Besides, one strength of the transactional net margin method is that net margins are less affected by transactional differences than is the case with price, as used in the traditional method. The net margins also may be more tolerant to some functional differences between the controlled and uncontrolled transactions than gross profit margins. Another practical strength is that it is not necessary to determine the functions performed and responsibilities assumed by more than one of the associated enterprises.But, transfer pricing is not an exact science, but that does not mean useless because it requires the exercise of judgment on the part of both the tax administration and taxpayer. Therefore, when we determine the best method, we must think about the attitudes of the relevant governments toward different transfer pricing methods and the availability and quality of data about potential comparables.