On Improvement Of China's Tax System For Transfer Pricing

With the globalization of the world economy, foreign direct investment by multinational companies (MNC) is developing rapidly. Accordingly, more and more transactions with related parties have occurred. People in different fields are increasingly concerned with the transfer price of these related party transactions. Theoretically, the policy of transfer pricing is one of MNC's strategic business policies. On the one hand, through the choice of suitable transfer pricing policy, MNCs can reduce transaction costs and maximize the after-tax profit. On the other hand, transfer price policy will affect the allocation of tax revenue between countries and facilitate MNCs to conduct tax avoidance. In order to prevent tax avoidance and reduction of tax revenue, many countries have set up tax systems to regulate transfer pricing. Currently, more than 70 countries across the world have set up tax systems for transfer pricing, among which are mostly developed countries. Tax system for transfer pricing was officially introduced into China in 1991. Comparatively, China's tax system for transfer pricing is still at its very initial stage, thus it inevitably has various defects and many points in the system need to be improved.The thesis consists of six chapters. Chapter one is an introduction. In this part the author illustrates the significance, background and structure of the thesis. Chapter two gives the definition, origin, functions and influential factors of transfer pricing. The relationship between transfer pricing and international tax avoidance is also discussed in this part. Chapter three analyses the basic principle of tax system for transfer pricing. All kinds of transfer pricing adjustment methods are also compared in this part. Chapter four discusses the theory and practice of advanced pricing agreement. This chapter analyzes current position of advanced pricing agreement in China. Possibility of promoting advanced pricing agreement and obstacles in promoting advanced pricing agreement in China are also explored in this part. Chapter five is the comparative analysis of international tax system fortransfer pricing and the current position of China's tax system for transfer pricing. The main problems in China's taxation system for transfer pricing are given in this part- problems existing in legislation of tax system for transfer pricing and problems existing in practice of tax system for transfer pricing. Chapter six comes up with solutions to the problems and suggestions on the improvement of tax system for transfer pricing in China. The suggestions include improving the legislation on tax system of transfer pricing, improving administration procedure and strengthening administration over tax collection, promoting advanced pricing agreement, strengthening international cooperation and coordination and strengthening administration over foreign investment enterprises.The main innovations of this dissertation are as follows. 1 .Broadening the studying horizon of transfer pricing issue. In this thesis the author approaches the subject in the context of international accounting, international finance management and international taxation. This paper avoids discussing this subject in the pure taxation background. 2. Using transaction cost theory and theory of internalization to analyze transfer pricing question. After the analysis, the paper concludes that tax avoidance is not the most important object of transfer pricing. The choice of transfer pricing method made by MNCs should balance several other influential factors. Accordingly, tax system for transfer pricing must not influence the choice of MNCs based on reasonable operating considerations. 3.Probing into the depth of the theory and practice of advanced pricing agreement. Unlike previous studies concerning this subject, this paper not only introduces the basic principles of advanced pricing agreement, but also makes a deep analysis on the possibility of promoting advanced pricing in China.