Tax authorities more sophisticated with transfer pricing audits

On 1 November 2013, China Taxation News reported that the Beijing State Tax Bureau (BSTB) made a transfer pricing adjustment and collected RMB110 million (US$18 million) in taxes from a pharmaceutical company.

When performing a functional analysis of the company, the tax authorities discovered that the company had both domestic and export sales businesses. The company performed a single function (manufacturing) for the export sales business, whereas it performed all functions (except research and development) for the domestic sales business.

Despite the greater volume of work associated with its domestic sales business, which would normally be expected to generate greater profit levels, the tax authorities discovered that the company’s profit levels for its domestic sales were much lower than the industry average. The tax authorities also found that about 70% to 80% of the company’s major raw materials were supplied by its foreign-related parties and asserted that related-party transactions were the main cause of the company’s low profit level for domestic sales.