Analysis Of Safe Harbor In Transfer Pricing And Risk Control

Setting up the Safe Harbor Rule in transfer pricing is beneficial to both taxpayers and tax authorities. On the one hand, Safe Harbor Rule can provide some certainties for taxpayers and reduce their compliance cost at the same time. On the other hand, Safe Harbor Rule reduces tax authorities’ burden, so that they can be committed to other cases’ audit and inspection with high-risk transfer pricing. Especially the diversities of means of tax avoidance of multinational enterprises, in recent years, need the tax authorities throwing more manpower and material resources to investigating the tax avoidance planning of the multinational enterprises’ profit shifting.Chapter 1 introduces the overview of international tax avoidance and the origins of the Safe Harbor. This chapter starts from the definition and origins of the Safe Harbor in transfer pricing, and leads to the importance of Safe Harbor rule in international taxation by expounding the change of the attitude of OECD to the application of the Safe Harbor Rule, then expounds the applicable basis of the Safe Harbor Rule and its reason.Chapter 2 introduces and analyzes the applicable ways and scope of the Safe Harbor Rule in current transfer pricing in different countries. Analyzes the applicable ways and scope of the Safe Harbor Rule from the point of reducing the risk of transfer pricing, protecting the lawful rights and interests of taxpayers as well as reducing the taxpayers’ cost. This chapter includes two parts: the first is the applicable ways of the Safe Harbor Rule. There are mandatory application and optional application, then analyzes their advantages and disadvantages and reach a conclusion of which application is more reasonable; the second part is to expound the applicable scope of the Safe Harbor Rule. Generally, it is applicable for specific taxpayers and specific transaction, and make analyses based on our country’s practice. This chapter makes a comprehensive analysis on the questions about Safe Harbor Rule in legislation in different countries with comparison analysis method. By the way of classification and comparison, this chapter makes introduction, comparison and analysis of the Safe Harbor Rule in different countries, and take the essence and discard the dregs, then analyzes and discusses the applicable scope of the Safe Harbor Rule in our country. Further, based on the solutions to the dilemma caused by Safe Harbor Rule, the effect of improving the Safe Harbor Rule will be achieved by expounding its advantage and analyzing its practicability as well as reducing the risk of transfer pricing.Chapter 3 expounds the risk caused by Safe Harbor Rule and its regulations. The risk mainly includes the transfer risk of one country to another country, which will lead to another country’s tax loss, double taxation to the taxpayers risk, supervision risk and the risk of taxpayers’ abusing the Safe Harbor Rule etc. These risks can be regulated by legislation and law-enforcement. In legislation, the applicable scope of the Safe Harbor Rule should be limited strictly and the clause preventing from abusing the Safe Harbor Rule should be increased, as well as some high-risk trade by transfer pricing should be removed. Taxation authorities may consider obtaining relative information by information change to regulate the risks in the whole process, who can also sign bilateral Safe Harbor Rule with the country with same or similar tax items and tax base, with which has many cross-border transactions. Update and adjust it by memorandum so as to regulate risks. In law-enforcement, taxation authorities may regulate risks by two methods: independent transaction principle and general anti-tax avoidance rule. The first method can effectively regulate the disadvantage to our country caused by other countries’ Safe Harbor Rule and regulate the case of taxpayers abusing the Safe Harbor Rule to evade tax, but its shortcomings are that it cannot be applied in the case of lack of comparable transaction and data. OECD proposes to use allocation method with constant proportion inside the group for the low value-added services to solve the problems. Moreover, the regulations applicable to independent transaction risk should also be considered "geographic advantage" factor. Because, with a link between the generation of profits to its taxing land. We should note the difference between different regions, as a result of these differences, just arbitrary independent transaction related to other parts of the state as comparable data is unreasonable, it shall first find a local independent transactions as comparable transactions in the case may not exist a local independent comparable data with other parts of the transaction should be considered "geographic advantage" factor to make reasonable adjustments. As a miscellaneous provision, the second method is to regulate the behavior without commercial purpose and only for evading tax with the Safe Harbor Rule. As the last means of anti-tax avoidance, it carries the function of the last line of defense of the law-enforcement. But it may lead to the risk of enlarging the tax authorities’ rights as its criterion has great subjectivity, which has conflict with revenue legal principle. Meanwhile, enterprises should also establish a set of inner-guidance to deal with the risk caused by transfer pricing and Safe Harbor Rule.Chapter 4 expounds the present situation, shortcomings and suggestions of legislation of Safe Harbor Rule in our country. On the basis of introducing the present state of the legislation about our country’s Safe Harbor Rule, this chapter points out the problems existed, puts forward the improving method and also provides the solutions, then puts forward constructive suggestions in legislation for our country’s Safe Harbor Rule based on the standards confirmed above. First, the safe harbor conditions detailed rules in the field of transfer pricing, not only to qualifying taxpayers as a safe harbor rules applicable conditions, the type of transaction eligibility criteria should be added, that excluding those at high risk of transfer pricing transactions, such as invisible the transfer of assets. The second is to establish and improve information sharing and exchange, while domestic institutions, the formation of information sharing between organizations, such as between the customs, industry and commerce, taxation and other departments to exchange information sharing, on the other hand, our country with his tax information exchange, obtain more reliable information, it is beneficial for taxpayers regulation, and can regulate the safe harbor rule taxpayer abuse, to protect our tax benefit will not be lost. Third, optimize the anti-avoidance rules, the existing anti-avoidance rule is reasonable business purpose test by regulation taxpayer tax avoidance is an effective enforcement tools to combat international tax avoidance, but it may cause excessive enforcement, breach of statutory tax principles. China should respect the strict definition of reasonable business purpose, to prevent abuse of power by the tax authorities led to the "victimizes innocent." Fourth, China should enhance the rank of relevant laws. Although China’s legislative law tax system should be established by law, but the rules of our scattered in department regulations, and its legal effect is not high class. Our country can learn from some of the national legislation and practice, with reference to some guidelines for international organizations, to establish guidelines for the safe harbor rules in transfer pricing legislation.The paper aims to analyse the scope and range of the application of safe harbour in transfer pricing and give the conlusions that the rational scope and way of application of the safe harbor rule. The paper also introduce the risk raised by the safe harbour and analyse the way to control the risk, and give advice to China to improve the law and regulation in this area.