Asia-Pacific Transfer Pricing Handbook

Chapter Thirty-Eight

China–Taiwan Trade

Once Forbidden, trade between Taiwan and mainland China (PRC) is becoming increasingly important for both countries, particularly for the smaller power, Taiwan. Multinational enterprises from either side of the Taiwan Strait face increasing risks of double taxation because both sides lack the administrative mechanisms that would otherwise preclude such anti–double taxation. More and more, transfer pricing is becoming a conflict mechanism between these two sides.

TAIWAN AND CHINA: A HISTORY LESSON

Sixty years have passed since the end of the Chinese Civil War and the promulgation of the Cross-Straits Economic Cooperation Framework Agreement (ECFA or Framework Agreement; governmental delegates signed that pact at the end of June 2010). The ECFA or framework agreement is a preferential trade agreement between the governments of the People’s Republic of China (PRC) and the Republic of China (Taiwan). The ECFA curtails tariffs and commercial barriers between both sides. Multinational enterprises are increasing cross-straits trade as both sides implement the ECFA.

Many businesses that engage in cross-straits trade are related enterprises (i.e., businesses that have facilities in both the PRC and Taiwan). As such, transfer pricing is a frequent issue between parties on both sides of the strait. For historical reasons, there remains a strong well of opposition to cross-strait trade. All too often, economic nationalism affects the positions of the ...