Multinational companies transfer profits through transfer pricing, thereby realizing the behavior of “virtual losses†to avoid taxation, and are being monitored by the Chinese tax authorities. On October 21, the reporter learned from people in the taxation industry that at present, the State Administration of Taxation is conducting a comprehensive survey of the tire industry, and the tasks have been assigned to the taxation departments around the country.
Transfer pricing is a commonly used tax avoidance method for multinational corporations. Companies (such as subsidiaries) in high-taxation regions generally provide products or services at lower-cost prices to affiliates (such as parent companies) in low-taxation regions, and then to parent companies. Selling at a high price, the subsidiary loses profits, and the profit remains in the parent company; or the subsidiary purchases raw materials, services or authorizations from the parent company at a price far higher than that in the same market, thereby transferring profits to the parent company.
As a branch of the big auto industry, the tire industry has joint ventures such as Michelin, Goodyear, and Cooper. According to statistics, 70% of China's tire production enterprises are joint ventures, and in 2009, one-third of the industry's enterprises suffered losses. It was previously mentioned that the joint venture between Michelin and Shuangqin Group lost RMB 1 billion for eight years, resulting in the Chinese shareholders' decision to withdraw.
Tian Wenqi, head of transfer pricing at Ernst & Young's central China office, said that the automotive, pharmaceutical, petrochemical, and financial industries have become the focus of attention by tax authorities in various countries. Take the automotive industry as an example. The profit gap between different markets is very large. Perhaps the head office is on the brink of bankruptcy, and China can maintain a profit growth of more than 20%. Under such circumstances, the Chinese tax authorities must take some defensive measures. .
Ernst & Young’s investigation report showed that the factors that triggered the investigation of the taxation department include: enterprises with large amount or type of related party transactions; enterprises with long-term losses, meagre profits or jumping profits; enterprises with lower profits than the same industry; Companies that have apparently incompetent functional risks that do not match; companies that have business dealings with affiliates of tax havens.
In 2008, the Chinese taxation department placed a total of 174 cases on transfer pricing, closed 152 cases, and recovered 1.24 billion yuan in taxes. Tian Wenqi expects that the number of cases filed this year will increase substantially. With the strengthening of supervision tasks, the tax department is supplementing manpower. At present, there are about 100 anti-tax avoidance workers across the country, and plans to increase to 500 by 2011, and this goal is likely to be achieved in advance.
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