Tax Compliance and Audit Adjustment : An Investigation of the Transfer Pricing Methodologies

Chan and Lo argue that multinational corporations (MNCs) that are involved in intra-group business use international transfer pricing to maneuver funds and choose the countries in which their profits are reported. However, such actions often trigger investigations from tax authorities in the jurisdictions in which MNCs operate. The way in which the tax authorities initiate transfer pricing audits and how they adjust the transfer prices should be equivalently important for the MNCs to formulate transfer pricing decisions. This study aims to take a step in this direction to provide insights into the legal framework of transfer pricing issues from the regulatory perspective in China. This article is of particular interest to international investors since China is the largest recipient of foreign direct investment in the developing world and more than 200,000 foreign affiliates are located in China, which represents 37% of the total foreign affiliates in the world.