Foreign-invested Enterprises In China Transfer Pricing Study

The multinational companies (MNC) gradually increased their investment in China with the expansion of 'Reform and Open Policy'. Especially after joining WTO in 2001, China has abated limitation to Foreign Investment Enterprise (FIE) almost in all investment section, the Foreign Direct Investment (FDI) into China increase sharply, which promoted the development of economy in China. However, because the development of transfer pricing laws lagged behind and the tax authority paid less attention to the transfer pricing of FIE, FIE have shifted a great deal of profit out of China for many kind of reason, and China lost lots of fiscal revenue. In order to protect the tax revenue, China tax authority has enacted a set of transfer pricing rules. In September and October 2004, the State Administration of Tax issued Detailed Rules for the Implementation of Advanced Pricing Agreement for Transaction between Associated Enterprises (for trial) and Tax Administration Rules and Procedures for Transaction between Associated Enterprises (revised). At the same time, the China tax authorities strengthened implementation the transfer pricing rules through joint tax auditing and selected tax auditing. Under such new environment, the FIEs face more challenge than before with their transfer pricing. On one hand, as a number of MNC, the transfer pricing policy of FIE in China should follow the global operation needs. On the other hand, the operating result should reflect the function and risk it takes as an independent resident tax payer in China. This article tries to give some advice on transfer pricing issues of FIE in China, based on the basic issue of transfer pricing under the environment of China Transfer Pricing rules the case analysis of Company R.Firstly, this article introduces the framework of transfer pricing, including the method of evaluate, analysis and definition systemically in a whole for transfer pricing. Secondly it mainly introduces the situation of FIEs' transfer pricing in China and the environment of transfer pricing laws in China. Finally it gives some advices to FIEs in China based on the analysis of risks and opportunities through transfer pricing case of the company R n Shanghai.