China’s State Administration of Taxation has issued new regulations – Bulletin 6 – to improve the administration of Special Tax Investigations and Adjustments and Mutual Agreement Procedures. The new rules clearly show that the Chinese tax authorities are paying more attention to related-party transactions and transfer pricing policies of Chinese-headquartered companies that are expanding around the world.
On 17 March 2017, China’s State Administration of Taxation (SAT) issued new regulations – Bulletin 6 – to improve the administration of Special Tax Investigations and Adjustments and Mutual Agreement Procedures. These regulations largely complete the revision of the transfer pricing-specific clauses of Circular 2, and add to the transfer pricing framework set out in the previously issued Bulletin 421 and Bulletin 642.
The Bulletin enters into effect on 1 May 2017, and the corresponding sections of previous regulations are repealed.
Following the release of the three new regulations (Bulletins 42 and 64 in 2016 and Bulletin 6 in 2017) on Special Tax Adjustments, the regulatory framework for Transfer Pricing in China is now spread across a number of regulations.
Bulletin 6 has clarified certain key transfer pricing issues, as well as the methodology and procedures for special tax audits and adjustments. In making the changes, the SAT has generally incorporated positions taken in the discussion draft regarding intangible assets, related-party services and the monitoring of profit levels, as well as the guidance on mutual agreement procedures. Bulletin 6 puts more emphasis on a risk-oriented tax administration system that looks to improve cooperation between enterprises and tax authorities, and overall compliance with the regulations. In clarifying the technical positions, the regulation incorporates changes arising from the OECD’s Base Erosion and Profit Shifting (BEPS) Actions 8-10 and Action 14.
Another encouraging sign is that the SAT has given due consideration to comments provided by enterprises and the public, and has revised and clarified some points that were of concern to taxpayers, or were not entirely clear, for example:
- Reinforcement of the arm’s length principle as the primary requirement for transfer pricing in China;
- Removal of the controversial “secondary adjustment” provision, as well as similar provisions allowing tax authorities to deny or recharacterize related-party transactions; and
- Permitting working capital adjustments when analyzing toll processing businesses, with the requirements of revisiting comparable companies when the adjustment to profit levels exceeds the acceptable range, that is, when working capital adjustments result in a profit level adjustment by more than 10 percent.
Source & more info: Deloitte