Profit Transferring of Multinational Enterprises in the Chinese Industry by Transfer Pricing

Abstract

Decentralized enterprises, such as multinational enterprises (MNEs), adopt transfer prices to coordinate the strategies of the operating functional divisions and marketing divisions in a multinational environment. This paper analyzes the existence of profit transfer though transfer pricing among MNEs in China, and employs quantitative analysis to evaluate the amount of profit that is transferred by this mechanism in the Chinese industry. The contradiction between MNEs' abundant advantages of operating in China and their abnormal low profit margins indicate the existence of profit transfer behavior. The quantitative analysis shows that in the industry, there is more than 300 billion yuan, one fifth of their net profit, transferred yearly outside China and causes 4.9% decline of the total net profit of the Chinese industry from 2012 to 2015.

Tax Αvoidance and Transfer Pricing: A VECM Regression Model

“…Moreover, companies that associate their executives' salaries with corporate profits show significantly higher profits and the higher the percentage of ownership by the Chinese government, the lower the level of declared profitability. Sun, Li, and Zheng (2017) used official statistics to determine whether there is a difference in profitability between multinational companies operating in China and domestic companies. In their analysis, they used corporate profits as a dependent variable and found that multinational corporations operating in China made an estimated profit transfer of 21% of their total profits.…”

“…Therefore, the respective tax administrations enact laws and enforce regulations on the documentation of intragroup transactions and the control of the profit transfers, to comply with the "Arm's Length Principle". According to this principle the price of each transaction should be regulated as if the companies involved were in fact independent as opposed to adjusting prices for the benefit of the same corporate structure (Sun, Li, and Zheng, 2017).…”