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The China State Administration of Taxation ("SAT") announced in July this year that it will be undertaking an internal restructuring. After the restructuring, the number of departments dealing with transfer pricing matters at the SAT will be increased from one to two. A new department, Large Enterprise Tax Administration Department ("LEAD"), will be formed to focus on the tax administration of large enterprises which are the key taxpayers in China, while the International Taxation Department will remain to be in charge of transfer pricing policy, bilateral advance pricing arrangement ("BAPA") and mutual agreement procedures ("MAP"). This change is likely to have implications to large enterprises operating in China and they are recommended to take proactive strategic considerations for their China transfer pricing matters and to ensure consistency in their China transfer pricing documentation.
The definition of large enterprises is still unclear. They may include sizable foreign investment enterprises (FIEs), domestic enterprises and corporate groups. From a tax administration perspective, the SAT is of the view that large enterprises require a higher level of attention and services. The main objective of LEAD is to improve the tax compliance standards of large enterprises. Initially it may adopt a mild or more "service-oriented" approach to deal with large enterprises to identify their needs as well as to educate them on the importance of proper tax management controls. LEAD may also play a role to bridge the communication between large enterprises and other policy-making departments at the SAT. It is anticipated that the SAT would be in a better position to serve the needs of large enterprises in future.
Currently, the tax administration of enterprises (both small and large enterprises) has mainly been conducted at the local tax bureau level and inconsistency in tax administration may have been experienced by large multi-national corporations with more than one operation locations in China. After the restructuring, it is anticipated that there would be improvement in consistency and efficiency with LEAD coordinating the tax administration (including transfer pricing audits and anti-avoidance investigations) of large enterprises. With tax administration organised in a more centralised manner, large enterprises with subsidiaries in different locations in China should ensure consistency in their transfer pricing documentation to support their China transfer pricing policies and strategies.
For large enterprises applying for BAPA and MAP, they may potentially have to deal with two separate teams at the SAT level since the anti-avoidance team in International Taxation Department will be handling BAPA and MAP matters while the team in LEAD will be responsible for the transfer pricing audits of large enterprises. During the transitional period, taxpayers may face some uncertainty on how the two teams will interact and coordinate if a large enterprise is going to seek BAPA or MAP while it is under a transfer pricing audit. |
