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On March 17th, 2017, China’s State Administration of Taxation (“SAT”) issued the Promulgation of the Administrative Measures on Special Tax Investigation, Adjustment and Mutual Agreement Procedure (“2017 Announcement No. 6”), which came into effect on May 1st, 2017, providing guidance on the application of the arm’s length principle and other related transfer pricing administrative matters.
According to Article 34 of 2017 Announcement No. 6, service charges between related parties should meet the following requirements:
– Services should bring direct or indirect economic benefits to a related service recipient, for which third parties would be willing to purchase or carry out by themselves under the same or similar circumstances; and
– The pricing methodology of the services should be in accordance with business norms and the arm’s length principle.
The tax authorities shall review the profile of a service provider and evidence proving the service activities in order to substantiate the service provision.
In particular, pursuant to Article 35, the expenses paid by a Chinese enterprise to its overseas related party for the following six types of services [GB1] [ATPA2] shall not be considered as beneficial services:
a) Services irrelevant to the function and risk profile of, or compatible to the current
operation of the Chinese enterprises;
b) Services such as control, management and supervision conducted by the shareholders over the Chinese enterprises for the purpose of ensuring the investment interests of direct or indirect investors of the Chinese enterprises;
c) The Chinese enterprises have already purchased or have already carried out the services [GB3] [ATPA4] by themselves, and thus leading to duplication;
d) Incidental benefits realized by the Chinese entities for the affiliation to the group, without receiving any specific services from the group;
e) Services that have been compensated in other intercompany transactions;
f) Other services that cannot bring about direct or indirect economic interests to the Chinese enterprises.
Should the Chinese enterprise [GB5] fail to retain a reasonable level of profitability due to the large amounts of outbound payments (e.g., service fees, royalties.) to related parties, there is a considerable risk that the competent tax authority could challenge the relevant transactions.
In China, pursuant to the relevant regulations and laws, the tax authority has the right to conduct a retrospective special tax investigation and assessment on the relevant intercompany transactions [GB6] [ATPA7] for up to ten years.
Our Services
We may assist you and provide the following tailor-made services:
– Review any service agreements and/or arrangements from both a PRC tax and transfer pricing perspective;
– Review the pricing methodology for services fees.
If you would like to know more about the most recent tax and financial developments in China, or about the services mentioned above, please contact us at info@phcadvisory.com.
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