By Agnes Lo, Associate Professor, Lingnan University, Hong Kong & Raymond Wong, Associate Dean, City University of Hong Kong
China’s State Taxation Administration published its latest report on China’s advance pricing arrangement (APA) program in April, revealing that once again that the most commonly used transfer pricing method for Chinese APAs is the transactional net margin method.
The China Advance Pricing Arrangement Annual Report (2018) discusses the regulations and the development of APAs in China. It also provides statistics for the period of 2005—2018 on APAs signed between taxpayers and the Chinese tax authority by year, transaction, type, region, industry, time taken, and transfer pricing method agreed.
The report reveals that in 2005—2018, the transactional net margin method was used in 79.4% of all APAs, followed by the cost-plus method (10.6%), comparable uncontrolled price method (3.3%), profit-split method (2.8%), and resale price method (0.6%).
In analysing previous annual reports, we find that the pattern is largely consistent across the years, with the transactional net margin method the most commonly used transfer pricing method for all the individual years during the reported period.
In particular, all APAs signed in 2018 used the transactional net margin method. Full cost mark-up (84.6%) and EBIT operating margin (15.4%) are the most commonly used profit ratios in applying the method.
The disproportionate popularity of the transactional net margin method for APAs suggests that this transfer pricing method is also being commonly used for transfer pricing tax audit adjustments in China.
The 2018 China APA report states that companies are urged to provide more information during the APA review and evaluation phase so that the tax authorities can use the profit-split method or the resale price method more frequently.
Our prior research reports a similar pattern for transfer pricing methods used during tax audit adjustments.
In particular, we find that Chinese tax regulators are less likely to use the profit-split method or resale price method for audit adjustments if companies are not willing to provide additional information during tax audits.
The full version of the 2018 APA annual report can be found at this link.
Agnes W.Y. Lo
Professor Lo has been a faculty member at Lingnan University for more than 15 years.
She mainly teaches Taxation that covers a wide range of topics including international tax planning, transfer pricing, and tax policy and its relevance to society. Her primary research areas include corporate governance and disclosure, and tax avoidance in general and avoidance through transfer pricing in particular.
Professor Lo co-authored a book entitled “International Transfer Pricing in China: Post WTO”, the content of which was used as training materials for the HKICPA workshops.
She has also published her work in the mainstream accounting journals including The Journal of the American Taxation Association, Journal of Corporate Finance, Journal of Accounting and Public Policy, International Tax Journal, etc.
Latest posts by Agnes W.Y. Lo (see all)
- China simplifies unilateral advance pricing arrangement procedures for some taxpayers - April 1, 2021
- China signed 21 advance pricing arrangements in 2019, report shows - November 17, 2020
- Hong Kong revises transfer pricing guidance on advance pricing arrangements - July 23, 2020
- Hong Kong revises guidance on advance tax rulings - April 29, 2020
- China simplifies procedure for claiming tax treaty benefits - November 17, 2019
Dr. Raymond M. K. Wong
Dr. Raymond Wong currently serves as Associate Dean (Undergraduate Programmes) of the College of Business at City University of Hong Kong. During his tenure in City University of Hong Kong, he has taken up various executive roles and has been contributing tremendously to the Department’s undergraduate education program.
He obtained substantial experiences in handling academic and administrative issues related to teaching and learning, globalization in accounting education, and knowledge transfers. One of his primary research interests is about taxation, with particular focus on reporting of related-party transactions and transfer pricing issues in China.
His research also covers accounting and auditing issues in China and his work appeared in several leading accounting and finance journals.
Latest posts by Dr. Raymond M. K. Wong (see all)
- China simplifies unilateral advance pricing arrangement procedures for some taxpayers - April 1, 2021
- China signed 21 advance pricing arrangements in 2019, report shows - November 17, 2020
- Hong Kong revises transfer pricing guidance on advance pricing arrangements - July 23, 2020
- Hong Kong revises guidance on advance tax rulings - April 29, 2020
- China simplifies procedure for claiming tax treaty benefits - November 17, 2019
Be the first to comment