Meaning
Financial exchanges between entities that share common ownership or control are subject to specific disclosure and tax rules. A related party transaction must be conducted at arm’s length to ensure that prices are not manipulated for tax avoidance. These dealings are closely monitored by the State Taxation Administration and the China Securities Regulatory Commission.
Statutory Requirement
The Company Law and the Accounting Standards for Business Enterprises require detailed reporting of these transfers. Every related party transaction must be listed in the annual financial statements with a clear explanation of the pricing method used. Failure to disclose these relationships leads to substantial fines and potential criminal charges for corporate officers.
Transfer Pricing
Authorities compare the prices in these internal deals with those found in the open market to prevent profit shifting. A related party transaction that deviates from the market norm may be subject to a retrospective tax adjustment. Documentation must prove that the terms are fair and reasonable for both parties.
Audit Risk
Internal and external auditors pay attention to these deals to verify that no assets are being siphoned off. A related party transaction often involves loans and asset sales between a parent company and its subsidiaries. Transparent records protect the integrity of the corporate structure and the interests of external investors by ensuring that all dealings are recorded at their true market value.
Detailed disclosure prevents the manipulation of financial results to mislead stakeholders.
