China Tax/Business News Flash

Mar 2017, Issue 8 

SAT issues administrative measures for special tax investigation adjustments and mutual agreement procedures

On 17 March 2017, the State Administration of Taxation (SAT) issued the Public Notice of the State Administration of Taxation Regarding the Release of the “Administrative Measures for Special Tax Investigation Adjustments and Mutual Agreement Procedures” (SAT Public Notice [2017] No.6, hereinafter referred to as the “Public Notice 6”). Public Notice 6 provides rules on risk management, investigations and adjustments, administrative review and mutual agreement procedures regarding the special tax adjustment and other relevant issues.

Public Notice 6 becomes effective from 1 May 2017. It supersedes the relevant provisions in Implementation Measures of Special Tax Adjustments (Trial Version) (Guo Shui Fa [2009] No.2, hereinafter referred to as “Circular 2”) and certain other regulations.

Public Notice 6 highlights tax authorities’ emphasis on strengthening the monitoring of enterprises’ profit levels, and improving enterprises’ compliance with the tax laws through special tax adjustment monitoring and administration as well as special tax investigation adjustments. It provides procedures for special tax investigation adjustments, which include (1) enterprises of special focus and establishment of an investigation, (2) investigation process, (3) information submission and burden of proof, (4) conclusion of the case and collection of tax payments, and (5) international relief process, i.e., mutual agreement procedures. It also provides relevant rules on self-adjustments by taxpayers, and specifies the methods and the implementation rules in relation to special tax investigation adjustments including (1) transfer pricing methods, (2) transfer pricing administration on equity transfer, (3) transfer pricing administration on intangibles, (4) transfer pricing administration on service transactions, and (5) special tax adjustment methods for certain special transactions or issues, namely toll processing, concealed related party transactions and offset of related party transactions.

Public Notice 6 reinforces the transfer pricing administration on intercompany intangibles and services transactions, and provides certain methods and principles for investigations and adjustments. Taxpayers are advised to review and adjust, if necessary, their transfer pricing policies on such transactions to ensure compliance with the new rules.

The SAT has released a series of new regulations as part of the revision to Circular 2, including Public Notice on Matters Regarding Refining the Filing of Related Party Transactions and Administration of Contemporaneous Transfer Pricing Documentation (SAT Public Notice [2016] No. 42, hereinafter referred to as “Public Notice 42”), Administrative Measures on the General Anti-Avoidance Rule (GAAR) (Trial) (Order of the State Administration of Taxation [2014] No. 32, hereinafter referred to as “SAT Order 32”), Public Notice on Matters Regarding Refining the Administration of Advance Pricing Arrangements (SAT Public Notice [2016] No. 64, hereinafter referred to as “Public Notice 64”).  The release of Public Notice 6 indicates that the revisions to Circular 2 are coming to an end and these regulations together form the basis for the three pillars of the SAT’s anti-tax avoidance work in administration (Public Notice 42), investigation (Public Notice 6 and SAT Order 32) and service (Public Notice 64).

In addition to enhancing regulation for anti-tax avoidance, the Chinese tax authorities are also establishing and expanding the joint investigation and review process, and identifying internal reviewers at all levels for anti-tax avoidance cases in order to enhance consistency of anti-tax avoidance investigations across the country. It is expected that the Chinese tax authorities will further strengthen anti-avoidance administration and investigations, and move forward on cases involving mutual agreement procedures. Taxpayers are advised to proactively manage their transfer pricing and other international tax risks.

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