On 16 April 2009, China's State Administration of Taxation (the "SAT") issued tax circular Guo Shui Han [2009] No. 188 ("Circular 188"), to further strengthen its transfer pricing follow-up administration. Listed below is the unofficial translation of the three key items addressed by this circular.
- Regarding the transfer pricing tax adjustment cases settled after 1 January 2008, taxation authorities should carry out a five-year period of follow-up administration starting from the first year following the latest year in which the adjustment was made.
- During the follow-up administration period, enterprises involved in transfer pricing tax adjustments in 2008 should provide annual contemporaneous documentation to tax authorities before 31 December 2009; enterprises involved in transfer pricing tax adjustments from 2009 should provide annual contemporaneous documentation to tax authorities before 20 June of each year following the year under follow-up administration. Tax authorities should conduct analysis and evaluation according to the contemporaneous documentation and tax filing information.
- Tax authorities should establish and perfect a supervision system for the transfer pricing follow-up administration. For enterprises that have applied for an advance pricing arrangement ("APA") during the follow-up administration period, prior to the APA being officially signed, the tax authorities should, in strict compliance with the transfer pricing tax adjustment plan, carry out follow-up administration on the enterprises' related-party transactions, prevent the enterprises' profits from declining, and guarantee the delivery of the full amount of tax revenue due to the State Treasury.
Observations
In response to the concerns that the current economic downturn may have adverse effects on the profitably of Chinese enterprises, Circular 188 requires the Chinese tax authorities to protect the tax revenue base by closely monitoring the related party transactions of the enterprises under transfer pricing follow-up administration. Decreases in operating profits or sustaining of business losses will be closely scrutinised and possibly disallowed by the Chinese tax authorities if the underlying nature of the related party transactions remains unchanged.
Circular 188 has also created challenges for enterprises under transfer pricing follow-up administration that would like to mitigate transfer pricing adjustment risks through the APA process. During the follow-up administration period, the local tax authorities shall evaluate and assess the arm's length nature of the related party transactions, and make transfer pricing adjustment based on the transfer pricing follow-up administration before an APA is concluded. |
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