An empirical analysis of the changes in tax audit focus on international transfer pricing

Koon Hung CHAN, Wai Yee, Agnes LO, Lai Lan, Phyllis MO

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

3 Citations (Scopus)

Abstract

International transfer pricing is an important financial management mechanism allowing multinational corporations to maneuver funds internationally. The manipulation of reported profits often triggers investigations from tax authorities. With the increased globalization of economies and changes in the business environment, tax authorities in many countries have refined their enforcement of transfer pricing regulations. In this study, we use archival data in China to examine whether tax authorities have changed their focus on auditing multinational companies over the past two decades. Our results indicate that Chinese tax authorities have significantly reduced their focus on auditing wholly foreign-owned enterprises, and placed more focus on Western multinationals and larger companies in the late 2000s as compared with tax audits in the early 1990s. Tax audits in the late 2000s also focus on export-oriented and loss firms. The findings show that changes in the business environment, regulations and the audit expertise of tax officials can lead to a shift in the focus of tax audits of international transfer pricing.
Original languageEnglish
Pages (from-to)94-104
Number of pages11
JournalJournal of International Accounting, Auditing and Taxation
Volume24
DOIs
Publication statusPublished - 1 Jan 2015

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Empirical analysis
International transfers
Audit
Transfer pricing
Tax
Authority
Auditing
Business environment
Multinational companies
Enforcement
Expertise
Large companies
Trigger
Profit
Globalization
Manipulation
China
Multinational corporations
Financial management

Keywords

  • Foreign investment enterprises; International transfer pricing; Tax audit focus

Cite this

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title = "An empirical analysis of the changes in tax audit focus on international transfer pricing",
abstract = "International transfer pricing is an important financial management mechanism allowing multinational corporations to maneuver funds internationally. The manipulation of reported profits often triggers investigations from tax authorities. With the increased globalization of economies and changes in the business environment, tax authorities in many countries have refined their enforcement of transfer pricing regulations. In this study, we use archival data in China to examine whether tax authorities have changed their focus on auditing multinational companies over the past two decades. Our results indicate that Chinese tax authorities have significantly reduced their focus on auditing wholly foreign-owned enterprises, and placed more focus on Western multinationals and larger companies in the late 2000s as compared with tax audits in the early 1990s. Tax audits in the late 2000s also focus on export-oriented and loss firms. The findings show that changes in the business environment, regulations and the audit expertise of tax officials can lead to a shift in the focus of tax audits of international transfer pricing.",
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An empirical analysis of the changes in tax audit focus on international transfer pricing. / CHAN, Koon Hung; LO, Wai Yee, Agnes; MO, Lai Lan, Phyllis.

In: Journal of International Accounting, Auditing and Taxation, Vol. 24, 01.01.2015, p. 94-104.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

TY - JOUR

T1 - An empirical analysis of the changes in tax audit focus on international transfer pricing

AU - CHAN, Koon Hung

AU - LO, Wai Yee, Agnes

AU - MO, Lai Lan, Phyllis

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AB - International transfer pricing is an important financial management mechanism allowing multinational corporations to maneuver funds internationally. The manipulation of reported profits often triggers investigations from tax authorities. With the increased globalization of economies and changes in the business environment, tax authorities in many countries have refined their enforcement of transfer pricing regulations. In this study, we use archival data in China to examine whether tax authorities have changed their focus on auditing multinational companies over the past two decades. Our results indicate that Chinese tax authorities have significantly reduced their focus on auditing wholly foreign-owned enterprises, and placed more focus on Western multinationals and larger companies in the late 2000s as compared with tax audits in the early 1990s. Tax audits in the late 2000s also focus on export-oriented and loss firms. The findings show that changes in the business environment, regulations and the audit expertise of tax officials can lead to a shift in the focus of tax audits of international transfer pricing.

KW - Foreign investment enterprises; International transfer pricing; Tax audit focus

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