CHINA'S tax authorities are strengthening efforts to block foreign invested companies' pricing transfers even though such tax reducing procedures are legal.

The State Administration of Taxation is expected to release a more detailed transfer pricing requirement by the year end, industry watchers noted.

"China's tax authorities have been more and more strict on transfer pricing audits and the implementation of anti-avoidance measures," said Spencer Chong, a partner with PricewaterhouseCoopers, who has been in the industry for a decade. "The new documentation requirement is part of the moves."

The tax administration is reviewing a draft of the new requirement, which is expected to take effect as early as late 2006, Chong said.

He has had frequent discussions with tax authorities as a veteran in the industry.

The requirement is also expected to be included in China's coming unified corporate income tax law for domestic and overseas companies.

At present, a foreign investment entity must file documents with basic details on the nature and volume of the company's cross-border related transaction.

The coming documentation requirement is expected to include more details such as organizational structure, nature of business, controlled transactions and applications for the transfer pricing method.

If tax authorities doubt the pricing of target companies, such corporations will have to turn in detailed documents for an audit. If the tax authorities find they are paying less through such transactions, adjustments will be made to increase a company's levy. In China, transfer pricing is more frequent in Beijing, Shanghai, Tianjin and coastal areas such as Dalian among multinational manufacturing firms involved in office equipment, chemicals and cars. Foreign players are the focus of the draft as they have more frequent cross-border transactions.

If a multinational company in China is losing money while expanding business while using frequent cross-border transactions, it will be targeted for an audit.

Transfer pricing has squeezed China's tax revenue by 30 billion yuan (US$3.7 billion) annually as foreign companies make their Chinese affiliate lose money intentionally by shifting the profit to their affiliates in lower tax regions, a SAT official said earlier.

"SAT is more confident in handling transfer pricing audits," Chong said. "Though the number of transfer pricing adjustments will not grow significantly, the related amount is expected to climb. In the past, cases involving tax adjustments of tens of million of yuan were eyed a tremendous triumph while in the coming years the value of cases will likely reach hundreds of millions yuan," added Chong.

Editor: Yan