China Ros To Be Subject To Transfer Pricing Regulations During 2010 Audit

Representative offices in China may find themselves having to comply with Chinas

transfer pricing regulations for the first time in the upcoming annual audit period.

China audits ROs (and all other foreign invested enterprises) each year on a calendar year basis, with a four month window to submit accounts for examination. This means that all ROs and other foreign investments must now start to prepare their accounts for the year 2010 and to have these fully prepared and audited by a third party CPA firm for submission no later than the end of April 2011.

What is different about the circumstances for standard representative office audits this time around is that for the first time, China requires ROs to follow the principle of proportionate functions and risks when calculating its taxable income. This means that ROs should comply in transactions with its overseas head office on the arms length principle, under which relevant incomes, costs and expenditures should be accounted for at fair prices.

We suspect that for 2010 audits, of particular interest will be the chief representatives salary as declared in China. Many CRs are resident in China, but maintain their salary payments as two separate incomes, one in China, the other back home. The Chinese authorities may well question this, as residency in China means the Chinese tax authorities possess the right to levy income tax on the full salary paid, regardless of whether that was met in China or not. Such circumstances may also lead to a reassessment of the total salary paid and declared in China, together with an upward assessment of both the individual income tax amount due in addition to the business tax payable by the representative office. If expatriate staff are engaging in such tactics, it is preferable for this issue to be addressed prior to the audit submission as tax treatments do exist that may assist with avoiding state imposed recalculations of tax due.

by: Dezan Shira & Associates

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