Meaning
Statutory administrative investigations and audit procedures conducted by tax authorities examine whether cross-border related-party transaction prices comply with the arm’s length principle. Under Chapter 6 of the Corporate Income Tax Law and tax administration implementation rules, tax officials execute a transfer pricing verification to identify profit shifting and tax base erosion across affiliated enterprise entities. Investigations review intercompany sales of goods, intellectual property licensing, management service charges, and cross-border financing arrangements over past tax years.
Unsubstantiated intercompany pricing structures result in formal administrative tax adjustments, retroactive assessments, and statutory interest surcharges.
Investigation Scope
Tax examiners target enterprise taxpayers reporting persistent operational losses, low profitability relative to industry peers, or large cross-border payments to tax-favored entities. Auditors analyze corporate transfer pricing local files, master files, functional profiles, and cross-border intercompany contracts. Field inspectors examine actual operational functions performed, assets utilized, and commercial risks assumed by local operating entities.
Audit Procedure
Tax authorities issue formal tax investigation notices to target enterprise entities to initiate field verification audits. Enterprise management must submit requested accounting ledgers, cost allocations, functional documentation, and economic comparative studies within thirty days. Tax teams conduct on-site interviews with key executive personnel and perform technical audits of enterprise operational processes.
Tax Adjustment
Tax authorities issue preliminary tax adjustment notices detailing proposed taxable income increases and additional tax assessments when pricing violations are verified. Enterprise taxpayers hold the statutory right to present administrative defenses and supplementary economic evidence during formal consultation sessions. Unresolved disputes result in final tax reassessment notices enforcing payment of additional taxes, penalty interest, and potential risk rating downgrades.
The transfer pricing verification mechanism provides state tax authorities with regulatory tools to protect national tax bases against cross-border profit shifting.
