Under China’s foreign exchange control system, enterprises, banks, and individuals cannot move money in or out of the country except in accordance with strict rules. The State Administration of Foreign Exchange (SAFE) and the People’s Bank of China (PBOC) regulate forex flow in or out of China.
In practice, changes since 2020 in the external business environment and other uncontrollable factors (e.g., the COVID-19 pandemic) may have caused the implementation results of MNCs to deviate from their transfer pricing policies. Accordingly, MNCs may consider using transfer pricing adjustments (TPA) to adjust their actual implementation results.
In recent years, the SAFE bureaus and banks nationwide have conducted pilot programs aimed at streamlining the procedures for Chinese companies to receive transfer pricing compensation from overseas related parties, which are based on authenticity and compliance checks on transactions. On January 19, 2021, the national SAFE issued on its official website Questions & Answers regarding Foreign Exchange Administration for Service Trade (II) (SAFE Q&A). Question 1 of the SAFE Q&A addresses how banks shall process the forex cash in-flows and out-flows of transfer pricing adjustments under the special tax adjustment for MNCs. Through this question, SAFE for the first time has clarified the Administration measures for forex cash in-flows and out-flows relating to TPA, and provided operational guidelines for banks and MNCs to apply for TPA in the future.
