The "Control" Criteria Applied To The Identification Of Related-parties In The Language Of Transfer Pricing

As an important issue of international tax avoidance, transfer pricing should beeffectively regulated by domestic legislation, including the formulation of theidentification of related parties. When supervising the activities of transfer pricing, taxadministration only first proves that the trading parties are related, to the priceadjustment in accordance with the arm’s length principle. In general, since the pricingpower is often based on the control of the trading parties, countries widely used the“control” criteria, namely, by setting up a series of objective criteria, to determinewhether the trading parties under control and to reflect the relationship between theparties. These control criteria directly determines the object by the transfer pricingadjustment. Hence, whether the control criteria can be used to reflect the reality ofcontrol, or whether it can be used to effectively identify the related party, is a problemworthy to be discussed.Otherwise, many countries proposed the “substantial control” in the process ofapplying the control criteria to identify the related party, i.e. according to the facts andthe legislative purpose,“control” could be found through the forms of transaction(usually allowed by law), when there was no specific control criteria in law. Thesubstantial control is left vague in order to allow the flexibility of administration toprevent tax avoidance and to apply the “substance over form” principle in the identification of related parties. This paper is focused on the control criteria,especially the substantial control, applying in the identification of related parties indifferent countries. Hope that through the legislative and case analysis, it will bebeneficial to the legislation of identification criteria in China.This article is divided into three chapters. Chapter1is the overview of transferpricing and related parties, explaining why the identification of related parties isimportant to transfer pricing legislation. Chapter2is the introduction of theidentification criteria of related parties. By introducing and comparing the legislationof different countries, the importance of substantial control is narrated. Chapter3isthe introduction and analysis of the control criteria in China’s legislation, whichremains several problems in the practice. There will be some positive effect on the taxsystem of transfer pricing, if the substantial control or the “substance over form”principle is applied.