Transfer pricing and the application of the arm's length principle in transfer pricing

1． Introduction
In order to evade taxation, transnational companies have followed the method of transfer pricing. And this act has drawn the attention of many countries throughout the whole world. Related legislation and research have been implemented and conducted in order to carry out effective regulations on transfer pricing through international cooperation.
In recent years, fast economic grow in China has been seriously damaged by the transfer pricing for tax avoidance in transnational companies. (Liao Yixin, 2001)According to the statistics from the Ministry of Commerce in China, up to the end of August in 2004, the amount of foreign invested enterprise has risen up to be 494025. Although almost half number of these enterprises has now shown to be at loss, it has been estimated that the operation of more than two thirds of the total amount of enterprises are at normal level due to their act of tax evasion. More than 60% of enterprises at loss have adopted the method of transfer pricing to avoid taxation. It is because of these factors that this dissertation has conducted deep analysis on the damage caused by transfer pricing, method of main transfer pricing and the countermeasures that Chinese government shall adopted in practice.
2． Transfer pricing of affiliated enterprises
2.1 Definition of transfer pricing