New regulations on transfer pricing will have far-reaching implications for financial services companies doing business on the mainland.
While the regulations are another step forward in bringing the mainland's tax regime in line with international norms, they also represent a further attempt to protect tax revenue.
In January this year, the State Administration of Taxation promulgated a circular affecting associated businesses that carry out transactions with each other. Transfer pricing places value on transfers of goods or services within an organisation, and is used as a means of allocating revenue and costs to various profit centres.
It also acts as a price setting mechanism for services performed by business units and is a means of evaluating financial performance by different units, and determining contributions to net income by different profit centres.
According to Michael To, executive director, Mazars, Hong Kong, the mainland is moving towards an international tax system and adopting international tax practices. 'If you have cross-border transactions dealing with your related parties you are supposed to conduct these transactions on an arm's length basis,' he said.
'Everything is measured with reference to the prevailing interest rate so you have to comply with this benchmarking of the interest rate applied to the loans you are lending to related parties in China,' he said.