INSIGHT: Implementation of Retroactive Transfer Pricing Adjustments in China

Oct. 28, 2019, 7:00 AM

Background of transfer pricing adjustment

To manage transfer pricing risks, multinational corporations (MNCs) have the incentive to make retroactive transfer pricing adjustments. When an MNC’s actual profit margin resulted from related party transactions that deviated from the reasonable target supported by a transfer pricing benchmarking analysis, a reasonable transfer pricing adjustment can help an MNC manage the double taxation risk from transfer pricing investigations initiated by revenue authorities and potentially increase global tax efficiency.

In general, transfer pricing adjustments in China may include the following approaches. Their impact on financial statements and tax liabilities varies.

The second approach to a transfer pricing adjustment is often not preferred by MNC taxpayers because of the potential double taxation impact. For a long time, the third approach of transfer pricing adjustment described above was also difficult to implement in China, mainly due to the difficulty for the banks and foreign exchange (FX) authorities to verify and make assessments under the existing Chinese FX rules. Under the existing Chinese FX rules and practices, commercial banks would proceed with the FX inflow and outflow based on a prescribed list from the FX authorities. The third type of transfer pricing adjustment is not clearly listed in the prescribed list, and there is not an official mechanism for the commercial banks and FX bureau to verify and assess the third type of transfer pricing adjustment made by taxpayers. As such, the third approach of transfer pricing adjustment is often difficult to implement in China. When MNCs would like to manage transfer pricing risks via a transfer pricing adjustment, it currently is more often done using the first approach of actual transaction price adjustment on a going-forward basis. But the first approach of transfer pricing adjustment often requires continuous monitoring and creates quite significant administrative burdens for MNC taxpayers.

Recent developments in transfer pricing adjustment from the FX bureau and banks

Recently, we have been in various discussions with the Shanghai FX bureau and commercial banks on the rationale and technical basis for MNCs to make the third type of transfer pricing adjustment, and how the banks and the FX bureau can verify and assess the transfer pricing adjustment based on the relevant transfer pricing rules. We observed a gradual change from the banks and FX authorities in this regard. For example, the Shanghai Branch of the State Administration of Foreign Exchange (SAFE), together with certain commercial banks, has recently set up a special implementation mechanism to facilitate the processing of such FX receipts under the transfer pricing adjustments described above. Taxpayers meeting certain criteria can apply for an FX receipt under the third type of transfer pricing adjustment. The transfer pricing adjustment FX receipt would be processed subject to review by the commercial banks with guidance from the FX bureau. In the initial phase, a commercial bank is designated by the SAFE to act as an initial window for handling such transfer pricing adjustment cases. Under the guidance of the FX bureau, the bank will review and assess the transfer pricing adjustment application package prepared by the applicant to demonstrate the authenticity and reasonableness of the transfer pricing adjustment. An assessment from independent accounting firms to ensure the transfer pricing adjustment is authentic and reasonable would increase the likelihood of acceptance of the transfer pricing adjustment application.

As far as we know, the SAFE in other regions (such as Jiangsu and Beijing) has not yet formed such a special mechanism like the Shanghai SAFE has, but there have also been individual cases successfully processed. It is likely that the FX authority branches in other regions may also consider a similar procedure with the local commercial banks to facilitate transfer pricing adjustments.

The Customs Side of Transfer Pricing Adjustment

The third approach of transfer pricing adjustments could have potential Customs and indirect tax implications, which should also be considered. Take the import of tangible goods as an example. If the initial import price is too high, and the transfer pricing adjustment is made by receiving FX going through the banks and FX bureau, normally it would not get the attention of and challenges from the Customs authorities. However, if the initial import price is too low, and the taxpayer needs to remit FX to make a transfer pricing adjustment, the FX bureau could require additional Customs verification and certificates to enable the remittance. Such outbound transfer pricing adjustment could cause Customs to look into the import pricing to assess whether additional Customs duty and import VAT should be applied.

Similar to the FX procedures and practices, it seems that the Customs authorities do not have detailed and uniform rules and procedures to enable such a transfer pricing adjustment. In fact, the processing of such transfer pricing adjustments still has practical difficulties. We have seen limited individual cases where taxpayers have successfully obtained approval from the Chinese Customs authorities to revise the Customs declaration forms, so that the taxpayer can make outbound FX remittance for a transfer pricing adjustment based on the revised Customs declaration forms.

For multinational corporations, the more encouraging news is that we recently learned that the Chinese Customs, and also some of the Customs authorities in other jurisdictions are contemplating a formal mechanism for the filing of transfer pricing policies and application mechanism for a transfer pricing adjustment. There is a possibility that the China Customs may consider formally putting in place such filing and application mechanisms for outbound transfer pricing adjustments, so that it would be easier to implement outbound transfer pricing adjustments from Customs and FX perspectives. It is worthwhile to continue to monitor the Customs authorities’ moves in this regard.


It seems that the Chinese SAFE is on the way to set up a mechanism to facilitate FX receipt for retroactive transfer pricing adjustments. Meanwhile the Customs authorities in various jurisdictions including the Chinese Customs are also contemplating a mechanism to facilitate outbound transfer pricing adjustments. Those recent measures and directional movements could indeed facilitate and provide certain practical solutions for MNCs to manage their transfer pricing adjustment risks in China and potentially improve global tax efficiency.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

For further inquiries on this topic, please contact the authors of this article:

Dr. James Zhao is a transfer pricing partner with Deloitte China and tax leader at Deloitte China LSHC industry. He can be reached at Tell+86 21 6141 1198 and jazhao@deloitte.com.cn.

Alina Huang is a transfer pricing senior manager with Deloitte China. She can be reached at Tell+86 21 2316 6104 and alinhuang@deloitte.com.cn.

Copyright © 2019 Deloitte Development LLC. All rights reserved.

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