In international trade, the use of transfer Pricing to achieve tax optimization is a common tax strategy of multinational companies, but it is necessary to strictly comply with national tax laws and international rules (such as the OECD transfer pricing guidelines). The following are the legal and compliance operating framework and precautions： --- ###**1. Core principle: Independent transaction Principle (Arm's Length Principle)** The pricing of transactions between all affiliated companies must comply with the ”independent transaction principle", that is, the price should be consistent with the price reached by non-affiliated companies in the same or similar transactions. Otherwise, it may face the risk of tax adjustments, fines and even double taxation. --- ###**2. Tax optimization strategy** #### **1. Transfer of profits to low-tax areas** -**Establishment of low-tax entities**: Set up subsidiaries in low-tax countries or regions (such as Ireland, Singapore, and Hong Kong) to transfer profits to these entities by adjusting the prices of related-party transactions. -**Example**: The parent company of a high-tax country sells goods to a subsidiary of a low-tax country at a lower price, or purchases services from a subsidiary at a higher price, reducing the profit of a high-tax country. #### **2. Supply chain reorganization and function allocation** -* *Function and risk allocation**: Allocate high value-added functions (such as R&D and brand management) in low-tax areas and allocate corresponding profits. -**Example**: Subsidiaries in low-tax countries hold intellectual property rights, collect royalties from related parties in high-tax countries, and transfer profits. #### **3. Use service fees and cost sharing** -**Cross-border service fees**: Subsidiaries in low-tax countries charge management, technical support and other service fees to associated enterprises in high-tax countries, and need to prove the authenticity of the services and the rationality of the pricing. -**Cost sharing agreement (CSA)**: Multi-country related parties jointly share R&D, marketing and other costs, and distribute future benefits in an agreed proportion. #### **4. Optimization of financing structure** -**Thin Capitalization**: Through a high-debt and low-equity capital structure, interest expense is used to offset taxes (subject to local capital weakening rules). -**Related party loans**: Subsidiaries in low-tax countries provide loans to parent companies in high-tax countries and collect interest to transfer profits to low-tax areas. #### **5. Tariff and value-added tax optimization** -**Reduce the value of import customs declaration**: Reduce the import price of goods within the scope of compliance, reduce customs duties and import value-added tax (pay attention to customs valuation rules). --- ###**3. Key compliance measures** 1. **Preparation of transfer pricing documents**： -Master File: An overview of the Group's global business and transfer pricing policies. -Local File: pricing analysis and comparable data support for specific transactions. -Country report (CbCr): Disclose the income, profits and tax payment status of each country. 2. **Benchmarking (Benchmarking)**： -Use comparable companies or transaction databases (such as BvD, Thomson Reuters) to prove that the pricing meets the market level. 3. **Advance pricing agreement (APA)**： -Sign an agreement with the tax authority to determine the pricing method of related-party transactions in advance to avoid disputes. 4. **Business substance requirements**： -Subsidiaries in low-tax areas must have real business activities (such as office space, employees, and decision-making capabilities), otherwise they may be deemed to be “shell companies” and invalid. --- ###**4. Risks and challenges** 1. **Tax audit risks**: Tax authorities of various countries (such as the IRS and the China Taxation Bureau) have strengthened transfer pricing reviews, especially transactions involving the digital economy and intangible assets. 2. **BEPS Action Plan**: The OECD's Tax Base Erosion and Profit Transfer (BEPS) project requires related-party transactions to have economic substance and restricts artificial profit transfer. 3. **Double taxation**: If the tax authorities of the two countries adjust the pricing of the same transaction, it may cause the enterprise to pay taxes repeatedly. 4. **Compliance costs**: Higher costs for document preparation, benchmarking and professional consulting. --- ###**Five, case analysis** **Case **: A technology company established a subsidiary in Ireland (tax rate of 12.5%) and is responsible for holding intellectual property rights in Europe. The Irish subsidiary collects royalties from the French parent company (tax rate of 33%) and transfers profits to Ireland. The structure needs to ensure： -The concession rate complies with the principle of independent transactions (if you refer to the comparable license agreement)； -The Irish subsidiary has the real functions of R&D team or outsourcing management. --- ###**Six, summary** The tax optimization of price transfer needs to be operated under the framework of legal compliance, and the core is to balance tax efficiency and risk control. Companies should： -**Regular review**: Adjust strategies in accordance with regulatory changes (such as the global minimum tax GloBE rules)； -**Professional support**: Rely on a team of tax consultants, lawyers and accountants； -**Avoid radical planning**: schemes such as the “dual Irish-Dutch Sandwich” have been eliminated by regulation. The ultimate goal is to optimize the overall tax burden through reasonable global supply chain design and pricing policies, rather than simply pursuing low tax rates.