This article was originally published on TP Week,
International Tax Review (www.tpweek.com)
The State Administration of Taxation (SAT) in China has recently
provided an overview of anti-avoidance initiatives in the Chinese
In 2012, the SAT will introduce on top of the electronic
platform that was originally built to monitor value added tax, a
new statistical indicator system, which monitors MNEs'
profitability by geographic regions and industries. The new system
will use data collected from related party transaction filings and
mandatory documentation collected from taxpayers.
New Internal Administrative Guidelines
The SAT has introduced the Provisional Internal Procedures on
Special Tax Adjustments, and the Provisional Internal Procedures on
Joint Decision of Important Special Tax Adjustments Cases, which
will both be effective from March 1 2012. These will serve as an
official standard in anti-avoidance investigation and negotiation
across different regions in China.
According to Chinese industry sources, these guidelines will
cover the following main areas:
Organisation and human resource allocation in anti-avoidance
Performance evaluation of tax bureaus/officials on special tax
Selection of investigation target, audit and adjustment
procedure, initiation and closing of audit cases, file management,
collection of taxes, following up investigation, etcetera;
Management issues such as use of funds, confidentiality,
information management, coordination between departments,
monitoring tax income sources, etcetera;
Conclusion and implementation of unilateral advanced pricing
Special tax adjustments on designated enterprises by the SAT
will be coordinated and managed by the Large Enterprise
Administration Department. Other enterprises' cases will be
coordinated and managed by the International Taxation
The local level tax bureau in charge of daily tax matters will
be encouraging taxpayers to perform self-adjustments to increase
their taxable profits, based on their analysis of the
taxpayer's tax return appendices and mandatory documentation;
For taxpayers that have already performed self-adjustments, the
tax bureau still reserves the right to conduct an official transfer
More National Anti-avoidance Campaigns
The SAT will leverage the data collected in its new systems in
order to efficiently identify industries and MNEs that have a
relatively low profitability in China. These analyses will serve as
the basis for industry wide investigations, as well as other
national anti-avoidance campaigns.
The SAT has recently conducted national anti-avoidance
investigations and industry analysis of the retail, real estate and
transportation industries, which reinforced their anti-avoidance
capabilities on services type of transactions.
Results of Anti-avoidance Efforts and APA in 2011
It is being reported that in 2011, anti-avoidance efforts have
contributed an increase of RMB 23.9 billion ($3.8 billion) in
China's tax income.
In the past year, China has conducted 10 bilateral discussions
with seven countries including the US, Japan, Korea on 29 APA and
corresponding adjustment cases, in which only seven of them have
reached consensus through the mutual agreement procedure (MAP).
However, on the other hand, MAP applications awaiting process by
the SAT remain at an increasing number of over 120 cases.
The SAT is also promoting the use of income approach in
extending its investigation targets from tangible goods
transactions to inter-company transfer of shares and transfer of
Low Success Rate in Bilateral APA
The above developments in China confirm a higher transfer
pricing scrutiny, a deepening of the overall transfer pricing
knowledge, and an announced commitment to transfer pricing, with
more systematic and nationwide reviews of tax payers' transfer
pricing set-ups and margins left in China.
They also signal a low success rate for candidates to bilateral
APAs which may be explained by relatively limited resources at the
SAT's anti-avoidance team in Beijing, as well as different
views put forward by Chinese SAT (notably with respect to local
intangibles, market premium and location savings) potentially
leading to some challenges in concluding negotiations with trading
partners (developed economies) with more traditional transfer
Finally, they show a wider use of the arm's-length concept,
transfer pricing methodologies and economic analysis in related
areas such as business restructurings and company intangibles
As per the terms of the SPA the said parent company had various rights and responsibilities as a sponsor.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).