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Developments in China’s Advance Pricing Agreement Programme

Tax rates from different countries provide a perceived incentive for multinational companies (“MNC”) to formulate their transfer prices to recognize lower profits in jurisdictions with higher tax rates and higher profits in jurisdictions with lower tax rates. By doing so, MNCs could reduce their aggregate tax payable. Chinese tax authorities have enacted tax rules and regulations to govern transactions between associated enterprises and to prevent unreasonable shifting of profits to jurisdictions outside China. The transfer pricing rules and regulations would create un-certainties to enterprises in terms of whether the transfer pricing between the affected enterprises and their associated enterprises would be challenged by the Chinese tax authorities.