The Canadian operation of global accounting group, Ernst and Young on Tuesday warned Canadian firms that changes to China's transfer pricing rules are likely to dramatically change the rules for multinational companies with operations there.
“China has previously offered significant incentives to attract foreign businesses to its developing economy,” explained Greg Noble, Canadian Market Leader, Transfer Pricing Services at Ernst and Young.
He continued:
“This shift to tax enforcement indicates a turning point, where China has asserted a new-found confidence in its infrastructure and ability to compete in the global marketplace. Furthermore, this move indicates that China is looking for ways to help pay for the infrastructure and services that their burgeoning middle class is coming to expect.”
According to E&Y, the new transfer pricing guidelines are aimed at increasing the Chinese tax base by having foreign multinational enterprises pay their fair share of Chinese income tax, and are similar to the processes in place in the US and Canada, whereby taxpayers must disclose intercompany transactions by filing information forms attached to their annual tax returns.
The firm observed that:
"In particular, the move raises the question of how these new rules will affect Canadian businesses with operations in China, or plans in the works to establish a presence there. One factor to consider is the increased time commitment from a compliance perspective, as the forms are both comprehensive and complex. In addition, taxpayers will be obliged to disclose any information requested by the tax authorities during the process of a transfer pricing audit."
“It will be interesting to see how this plays out,” suggested Noble. “The price of labour is going up in China and international commerce is so fluid that this move could have foreign companies taking a very close look at their Chinese operations.”
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