Apr 2010
The China Taxation News, an official newspaper under the State Administration of Taxation ("SAT") of China, recently reported that pharmaceutical and automotive industries are China tax authorities' focus in the year 2010 in respect of anti-avoidance administration.
Zooming in intangibles and other complex arrangements Being the world's most important manufacturing base, China's anti-avoidance enforcement historically was focused on transfer pricing of contract manufacturing operations, which predominantly involve tangible goods transactions. In recent years, as the China tax authorities gained more experience, there was a clear trend that greater emphasis had been put on more complex transactions, such as intangible assets and services transactions, equity transfers, cost sharing arrangements, thin capitalization, controlled foreign corporation. Taxpayers should note that, under the China tax laws, intangible transactions are subject to business tax. As a result, the transfer pricing of intangible transactions could also be scrutinized by the China tax authorities from a business tax perspective.
Automotive and pharmaceutical companies under spotlight Foreign-invested automotive and pharmaceutical companies typically have high volume of crossed-border licensing and servicing transactions, which is one of the possible reasons why the China tax authorities decided to focus on them in 2010. Another possible reason is that the China tax authorities are keen on developing transfer pricing analysis framework that could better reflect the special economic environment in China. This framework includes some ideas such as location savings, China market premium and local market intangibles. As the automotive and pharmaceutical sectors are subject to stringent industrial regulations, the economic environment faced by companies operating inside China are arguably different from that faced by companies operating outside China. Therefore, the China tax authorities may perceive the two industries could provide good opportunities for exploring the above ideas.
Increased bilateral negotiation activities The SAT has also put great emphasis on developing its Advance Pricing Arrangements (APA) and Mutual Agreement Procedure (MAP) programs. The SAT views that the results from the APAs and MAPs will not only affect the involved companies' tax status, but also provide precedent cases for other players in the industries to follow and thus have profound impact on the industry-wide profitability. Therefore, while the SAT is progressing quickly in this arena, it also maintains a high level of cautiousness.
In the year 2009, 7 bilateral APA and 2 MAP cases have been concluded. Currently, 39 bilateral APA and MAP cases are being processed by the SAT, involving countries such as Japan, Korea, the US, Denmark, and Singapore. China has concluded 12 bilateral APAs and 7 MAP cases since 2005.
Strengthened enforcement China is determined to develop its anti-avoidance administration quickly in terms of both skills and strength. In 2009, the total tax revenue recovered under anti-avoidance enforcement hit a record high of RMB 2 billion, representing a 69% growth from 2008. In order to clarify and standardize the work procedures for anti-avoidance enforcement and the responsibility of different levels of local tax authorities, the SAT plans to issue further guidelines later this year as a follow-up to the "Special Tax Adjustment Implementation Measures (Trial)" issued in 2009.
