ABOUT 80 foreign-invested export companies turned up in April for a seminar at the Shenzhen local tax bureau. It was 'Tax Collection Promotion Month' and the firms were being offered the chance to learn more about China's transfer-pricing laws. Attendees got a shock when they realised they had not been invited at random, and the meeting's purpose was not solely educational.
Officials were looking for targets to investigate: top of the list were companies that failed to take up the bureau's 'invitation'. Those that did were next.
Soon after the seminar, the majority of the companies received an investigation form requiring them to submit five years of financial data, to be followed by interviews with investigators and factory visits.
China is getting serious about transfer pricing, a development that reflects the maturing of its export industry and changing priorities in the post-World Trade Organisation era.
Transfer pricing is a notoriously complex area of accounting, but boils down to a simple issue: where does a company book its profits? Countries have different tax rates, and many companies operate in more than one country. A multinational that can report its profits in a lower-tax (or zero-tax) jurisdiction will therefore reduce its overall tax bill.
Inter-group dealings - when one arm of a company sells goods or services to another - have the potential to shift profits across borders. This is the nub of a global game of cat and mouse that sees tax authorities around the world pore over company accounts to ensure that the prices at which such inter-group transfers are recorded are justified.