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The Challenges and Opportunities China Faces With Transfer Pricing
China's State Owned enterprises (SOEs) have been expending considerable resources in developing and expanding their outward investments into the energy and mining sector. Taxand Canada analyses the transfer pricing issues Chinese corporations will be faced with.
Chinese acquisitions into the natural resource sector will become abundant, and create the need for specialised transfer pricing experts. The analysis used to determine the respective earnings of related parties for their functions, such as distribution activities, will be scrutinised. Understanding this scrutiny requires Chinese multinationals to apply transfer pricing policies that will result in arm's length prices being implemented between related parties.
Royalties for the use of know-how, and the economic ownership of such know-how intangibles are also a contentious issue. Managing who contributes to valuable know-how intangibles within the natural resource sector, and who takes risks associated with their development, is key to allocating profits in the most tax efficient manner.
Chinese natural resource firms can benefit from successfully applying transfer pricing strategies, by placing the key assets, functions and risks in tax jurisdictions where they want the profits to flow. Chinese firms can take advantage of transfer pricing by taking a proactive approach to placing functions, assets and risks strategically within newly acquired multinational entities in order to minimise after tax profits.
Well-planned transfer pricing strategies can assist in allocating profits in the most tax efficient manner by strategically placing functions, assets and risks in tax jurisdictions where Chinese parents want the profits reported. China can repatriate much of the global profits by getting the Chinese parent to assume more of the risks associated with resource development and extraction, and by performing more value added functions.