A study on transfer price of Multinational Enterprises （MNEs）—The effect of improper transfer price to China餾 economy and the countermeasures

SUN Rong

ABSTRACT：This paper examines impact on Chinas economy by the improper using of transfer prices of MNEs and how to control it in China.The author make the result that Chinese government urgently needs to improve the anti-avoidance tax legislation to strengthen the competitiveness of domestic enterprises， as well as control the behavior of MNEs who will use improper transfer prices.

Key words：transfer price， multinational enterprises， tax avoidance， jointventures.

Introduction

In nowadays， globalize markets， international foreign direct investment， and worldwide procurement combine to create a complex， sophilicated and integrated business environment.About 30 years ago， MNEs accounted for 25% of the worlds trade and 25% of the worlds GNP.The same trade continues to rise and now the world is dominated by the 500 MNEs who control 90% of all the world foreign investment.In 2017， China newly established 35652 foreign-invested enterprises； the utilization of foreign capitals grew by a large margin which reached 8775.6 billion yuan， increasing 7.9% compared to the last year.A large number of large multinational enterprises conduct their operations and gain profits through their subsidiaries.Hence， there are more and more transactions between related parties in international trade affairs.Transfer price has become international issue of strategic importance， not only for MNEs but also for the whole world economy.Therefore， there is necessity to study about transfer prices of Multinational enterprises.

Chapter 1 Impact on Chinas economy by improper use of transfer price

1.Improper transfer price reduces Chinas tax revenue

Chinas normal corporate income tax rate is 33%.In order to attract foreign investment， before the year of 2008， Chinese government has given "two exemptions and three reductions" and other tax concessions to foreign investors.However， compared with Bermuda， the Cayman Islands and other tax havens， the income tax rates remain relatively high.Many MNEs use internal transfer prices to operate subsidiaries in China to lower tax rates country or region， so as to avoid the high income tax in China.

2.Improper transfer price impacts Chinas macroeconomic control

Fiscal policy is an important tool for macroeconomic control， while the tax system is one of the very important components of fiscal policy.MNEs transfer the profits through transfer prices， making the actual tax rate lower than the nominal rate， even the same rate with the encouraged industry.It reduces the enthusiasm of resources flowing into the encouraged industry so that adjustment of industrial structure can not achieve to expectation effect.It is clear that income tax evasion of MNEs makes more profits flows to foreign enterprises and the joint ventures in China face the trend of a growing gap in income distribution.

3.Improper transfer price damages the benefits of affiliated enterprises in China

In the joint-ventures and cooperate enterprises， although the profits are shared between both Chinese and foreign enterprises， most of discourse power and core technologies are controlled by foreign hands， leading to foreign investors can easily use the internal transfer prices to make the profits of joint-ventures and cooperative enterprises decreased or even zero profits； it will make Chinese enterprises reducing profit-sharing or no profits.

4.Improper transfer price damages fair competition and the balance of payment in China

In order to acquire more benefits， a MNE will set out a low internal transfer price so that the price of its subsidiarys product is lower than the normal price or even at a price lower than cost.Once they attain the purpose of squeezing competitors and monopolizing market， they will greatly increase the prices for the products.At that time， the consumers have no choice.Moreover，the usage of transfer pricing will enable foreign investors to increase total profits， thus driving a large number of foreign import investment.It will lead to China's international balance of import goods payments increased and the current account outflow.The transfer price leads to the growth of import products and the reduction of export products， it will deteriorate international balance of payment in China.

Chapter 2 How to control the improper use of transfer price in China

1.Change the attitude to foreign inventors

We should make all levels of governments understanding that foreign investment is not only has an active role on Chinas economy， but it also has a negative impact； they should insist their own situation during the dialogue with MNEs.Besides，we have to know that control improper transfer pricing in China will not damage our relationship with foreign countries.

2.Strengthen the construction of a tax team and raise the levels of tax authorities

In the past， the work of tax evasion investigations are done by local tax authorities， the investigations are often subjected to the jurisdiction of the tax authorities which lack of cross-regional cooperation.Therefore， it should put the work of anti-avoidance authorities to higher tax authorities； even they can establish a special anti-avoidance institution under the state administration of taxation.It can avoid the intervention by the local government during the time of survey and also can help strengthen regional co-operation.

3.Strengthen tax legislation and international cooperation

The main trick of prior confirmation is reserving the way of transfer pricing， which means the related parties inform their internal transfer price and the way of pricing to the relevant national tax authorities before the transaction happens.After the confirmation by the tax authorities， the MNEs can take the prices as the tax prices.Strengthen international cooperation includes the strengthening of international market information collection， the establishment of intelligence information systems， intelligence exchange and mutual assistance in the international market in order to provide accurate and timely information anti-multinational companies.

4.Strengthen the control right of China in joint-ventures and cooperate enterprises

If China wants to limit abuse using of transfer prices， it should strengthen the control of Chinese side and the government should adopt restrictions on foreign shareholding ratio.When Chinese enterprises are negotiating with foreign companies about joint-ventures and co-operations， it should strive to master core sector control that it can grasp the control right of core departments to effectively limit the improper foreign transfer price.

5.Enhance the strength of domestic enterprises

Enhance the strength of domestic enterprises， it requires the enterprises own efforts and the support of all aspects are given by the government.Chinese government should support domestic enterprises， at least equal domestic and foreign enterprises， the implementation of new income tax law is a good support for domestic enterprises.

6.Recommendations

In recent years， the government has already taken steps to contain the transfer pricing in China.Law of the People's Republic of China on Enterprise Income Tax was enforced since 2013， which abolished the special preferential tax policy for foreign companies but granted domestic companies the same national treatment as foreign companies.In order to revise international tax rules and curb the circumvention of global tax obligations， 61 countries， including China， jointly signed the Base Erosion and Profit Shifting（BEPS） Action Plan at the end of 2015， the most significant reform of the international tax rules system in the century， aimed at combating tax evasion by transnational corporations.Implementation Regulations for Special Tax Adjustments was published by the state administration of taxation in April， 2017.It is an important method for tax authorities in China to combat the use of transfer pricing by multinational enterprises to avoid tax evasion，and the anti- tax surveys of multinational corporations are expected to increase significantly in the future.

References：

[1]Lingling LIU， （2006）.“Multinational transfer prices on China's economy and Countermeasures”.Liaoning Economy.6：pp35-68.

[2]Shengjun LIU and Yuanyuan ZHANG.（2008）.“On transfer pricing of transitional corporation.” Business Economy.11.： pp27-83.

[3]CBNDaily.“China combat Transnational Enterprises Avoidance and create Tax New Anti-Tax Legal System.” 12，April，2017.

[4] Law of the People's Republic of China on Enterprise Income Tax， 2013.

Ke WANG， （2018）.“China increased by 7.9% year-on-year in 2017”.people.com.cn

Brief Introduction：

SUN Rong，SINOPEC SALES CO.LTD.SOUTH CHINA BRANCH.