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China's State Administration of Taxation (the "SAT") recently issued a circular, Guo Shui Fa [2009] No.1, outlining the work plan for tax collection and administration in 2009, and strengthening tax anti-avoidance including transfer pricing work continues to be one of the key areas. According to the circular, the SAT will focus on the following transfer pricing administration in 2009:
- Intensify transfer pricing examination and investigation;
- Prevent avoidance and evasion of Consumption Tax through transfer pricing arrangements between related parties on products such as liquor that are subject to Consumption Tax;
- Enhance administration on reporting of related party transactions;
- Study and explore anti-avoidance measures concerning thin capitalization, controlled foreign companies, use of tax havens for tax avoidance, and etc.;
- Arrange negotiation and signing of unilateral and bilateral Advance Pricing Arrangements; and
- Intensify efforts on exchange of information with treaty partners.
In 2008, the Chinese tax authorities formally initiated transfer pricing audits on 174 companies, and concluded 152 audit cases resulting in total tax adjustments of RMB1.24 billion on total income adjustments of RMB15.55 billion, with the single largest tax adjustment being RMB423 million. The relatively small tax adjustment amount (less than 8% of total income adjustments) is likely attributable to various tax holidays enjoyed by the taxpayers during the audit period. However, as most tax holidays are being phased out and the statutory corporate income tax rate now stands at 25%, Chinese taxpayers will likely face larger tax adjustments in the event of a transfer pricing adjustment going forward, and tax adjustments on any inter-company transactions occurred after 31 December 2007 carry a special interest levy including a penalty component. The penalty interest may be avoided only if the taxpayer prepares and submits upon request contemporaneous transfer pricing documentation and other documents unless it is otherwise exempted. |
