Transfer pricing refers to the price set between related enterprises when selling goods, providing services, transferring intangible assets, etc. In cross-border economic activities, using transfer pricing between affiliated enterprises to avoid taxes has become a common method of tax evasion. The general practice is: enterprises in high-tax countries sell goods, provide services, and transfer intangibles to their affiliated enterprises in low-tax countries. Low prices are set for assets; high prices are set when enterprises in low-tax countries sell goods, provide services, and transfer intangible assets to their affiliated companies in high-tax countries. In this way, profits are transferred from high-tax countries to low-tax countries, thereby minimizing their tax burden.

In order to prevent this from happening, the tax authorities use the principle of arm's length transactions to reasonably determine the transfer pricing of the company's products so that they can pay taxes reasonably domestically. This gives rise to the concept of transfer pricing.

Enterprises should follow the principle of independent transactions and adopt reasonable transfer pricing methods when conducting related transactions and when tax authorities review and evaluate related transactions. Transfer pricing methods include comparable uncontrolled price method, resale price method, cost plus method, transaction net profit method, profit split method and other methods consistent with the arm's length principle.

1. Comparable uncontrolled price method. The price charged for the same or similar business activities as the related transaction between unrelated parties shall be regarded as the fair transaction price of the related transaction.

Generally, the comparable uncontrolled price method can be applied to all types of related party transactions.

2. Resale price method. The fair transaction price of the goods purchased by related parties is the price at which the goods purchased by related parties are resold to non-related parties minus the gross profit of comparable non-related transactions.

The resale price method usually applies to simple processing or pure purchase and sale business where the reseller does not change the appearance, performance, structure or change the trademark of the goods or other substantial value-added processing.

3. Cost plus method. The fair transaction price of related transactions is based on the reasonable costs of related transactions plus the gross profit of comparable non-related transactions.

The cost-plus method is usually applicable to related transactions related to the purchase, sale, transfer and use of tangible assets, provision of labor services or financing.

4. Transaction net profit method. The net profit of related transactions is determined based on the profit rate index of comparable non-related transactions.

The transactional net profit method is generally applicable to related transactions such as the purchase, sale, transfer and use of tangible assets, the transfer and use of intangible assets and the provision of labor services.

5. Profit split method. The amount of profit that should be distributed to each other is calculated based on the contribution of the enterprise and its related parties to the combined profits of related transactions. The profit split method is divided into general profit split method and residual profit split method.

The profit split method is usually applicable to situations where related-party transactions between parties are highly integrated and it is difficult to evaluate the results of each party’s transactions independently.