"China has been bearing losses of more than 30 billion yuan (US$3.6 billion) annually in recent years due to the tax-evasion activities of foreign-funded enterprises," said Su Xiaolu, a SAT official.

Many foreign-funded enterprises report losses but continue to expand their operations; while also showing other signs of profit manipulation.

"Some foreign-funded enterprises may be engineering losses in China by buying high from and selling low to related parties, and transfer pricing has become a convenient mechanism for enterprises to save taxes and to repatriate money overseas without declaring a dividend," said Zhang Renji, a professor with the Shanghai National Accounting Institute.

Under an APA, Zhang said, taxpayers will propose a pricing policy and a calculation method to the relevant tax authorities for pre-approval; by which it will be significantly easier to oversee and regulate the practice of transfer pricing -- the amount charged on a transaction between subsidiaries or related parties.

"The rules, in accordance with China's commitments to the World Trade Organization (WTO), also represent a critical step forward to establishing more efficient and transparent tax collection and administration practices," Zhang said.

"The move shows China is trying to protect its tax base and wipe out tax evasion," said PricewaterhouseCoopers tax partner Spencer Chong in Hong Kong.

"With its entry to the WTO and the concessions it has made in the form of lower tariffs and custom duties, China needs to get revenue from other sources, and tax collection from transfer pricing enforcement will likely be one of these sources," said Chong.

Prior to 1998, the Chinese approach to transfer pricing was incorporated in the Income Tax Law of the People's Republic of China on Enterprises with Foreign Investment and Foreign Enterprises.

The law required that foreign-funded enterprises not buy products from their parents at prices considerably higher than market prices.

In 1998, SAT published a circular titled "Tax Administration Rules and Procedures for Transactions between Related Parties", which consolidated the previous transfer pricing legislation and rulings.

A programme was set up to target foreign enterprises suspected of evading taxes and described methods for calculating their "true" taxable income.

Informed sources said that up to 100 foreign-funded enterprises have applied for APAs up to now.

(HK Edition, China Daily July 15, 2003)