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The transfer pricing melting pot

The transfer pricing melting pot
15 May 2014

Also published in Global Banking & Finance Review and International Tax Review, 23 May 2014

Transfer pricing application differs widely across East and West, causing uncertainty around what the future will hold for multinationals. Practical steps to retain flexibility and ensure efficient tax administration for both taxpayers and revenue authorities were discussed today at the Taxand Global Conference hosted by Taxand China in Shanghai.

Frederic Donnedieu de Vabres, Chairman of Taxand, the world’s largest independent global organisation of specialist tax advisors to multinational businesses, provides an overview of this session presented by members of Taxand’s global transfer pricing team, Antoine Glaize, Taxand France; Sanjiv Malhotra, Taxand India; Andrey Tereschenko, Taxand Russia and Marc Alms, Taxand USA:

“The birth of the millennium saw South East Asia, along with other parts of the emerging world, begin to meet eyes with the West. With such pull factors as lower corporation tax and cheaper labour, many of these states became mass manufacturers to satisfy the high demand of western consumerism. The biggest player often called ‘the factory of world’ is China.

History is constantly punctuated with the rise and fall of state economies and the financial crisis of 2008 proved to be one of those events which sent the international economy on a different trajectory. It exposed the weaknesses of free market capitalism.

However coming out of the recession new seeds have been sown for growth. The IMF, which reported China becoming the number one economy in the future, also declared that the likes of Russia, Brazil, Indonesia and Mexico now reside within the top 12 global economies. By contrast, high costs and lower growth push the UK and Japan further behind the US than in 2005. Emerging markets are now carving out a foothold for themselves within the global economic order and are closing the gap on the West.”
There is no greater example of this convergence between East and West than the economies of China and the US, two countries which are entwined through trade. China now competes more closely than ever with the US for the economic throne. The constant manipulation of the valuation of the yuan and the dollar in order to make exports more competitive, is one of many battlegrounds where this competition is played out. Where the West, in the form of the US, used to dominate; now it has met its match.

Whether China’s wealth will remain concentrated in commercial areas such as Shanghai and Beijing is questionable.  China’s domestic investment in infrastructure is likely to decline as  it extends into South East Asia. The country is also trying to reorient the economy from having so much dependency on cheap labour and exports, by increasing domestic consumption and encouraging a shift towards services. These initiatives will hopefully envision a 2020 East Asia which is thriving across all regions and distinct from the US, with a rich North and a poor South dictated by free trade."

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Taxand's Take

“With further economic and social reform on the cards for China and greater convergence between the East and West predictable, it will be interesting to see if a convergence in the economy could also result in a convergence in taxation.”

Taxand's Take Author