TaxNewsFlash-Transfer Pricing

May 8, 2009
No. 2009-26

China: Guidance Directs Tax Authorities to Focus on Specific Industries, and Taxpayers with Overseas Investment and Related-Party Transactions

Following closely after the release of Circular No. 188 (see TaxNewsFlash-Transfer Pricing 2009-25), China's State Administration of Taxation released Circular No. 85* that generally aims at strengthening investigations of various tax practices by the tax authorities.

* Guoshuifa No. 85 (Circular No. 85) was issued by the State Administration of Taxation on 29 April 2009.

Circular No. 85 addresses transfer pricing in the first part of its fourth section. As with Circular No. 188, local tax authorities are encouraged to strength their anti-avoidance investigations and to aim at achieving “breakthroughs” in investigation cases.

Tax Authorities to Focus on Specific Industries, Sectors

Circular No. 85 directs the local tax authorities to focus investigations on specific industry groups—clothing and shoe manufacturers, information technology system manufacturers, and contract manufacturers of computers, as well as fast food restaurants, large-scale retailers, manufacturers of drinks, elevators, and automobiles—and on those groups that are “less affected by the economic downturn.” This last group, according to the guidance, includes entities engaged in financing for highway constructions, tire manufacturers, pharmaceutical companies, and hotel chains.

The tax authorities are also given specific guidance concerning how to conduct audits, being told to focus on the “investments, operations, related-party transactions and annual filings” of enterprises. They also are directed to increase tax collection efforts by focusing on the amount of taxable profits reported for each industry.

In a separate paragraph, the local tax authorities are told to enhance their examination efforts concerning enterprises with outbound investment, especially those entities with overseas subsidiaries. In these situations, the authorities are to question whether there have been payments of sufficient royalties or service fees, to make sure these enterprises are not simply moving profit into tax haven jurisdictions.

Circular No. 85 also discusses and encourages the use of advance pricing agreements (APAs). The guidance states that the tax authorities need to engage in bilateral negotiations and apply bilateral APAs with an aim towards avoiding double taxation.

KPMG Observation

As with Circular No. 188, Circular No. 85 serves to emphasize the State Administration of Taxation’s efforts in the areas of audit and investigation and also in achieving APAs.

By naming particular industries and structures as audit targets, Circular No. 85 provides very specific directions for the tax authorities, and given this focus, observers note that enterprises within those industries or with overseas investment or subsidiaries need to consider this guidance as an indication of future increased scrutiny, further investigations, and possible adjustments.

While China's tax authorities previously appeared to focus mainly on transactions related to inbound investment by foreign-owned multinational entities, Circular No. 85 reminds officials to focus also on transactions resulted from outbound investments by Chinese-owned multinationals.

Besides emphasizing audit and investigation, both circulars also mention APAs—which have been encouraged since the issuance of Circular No. 2 in early January 2009. This encouragement is not without limits, as Circular No. 85 mentions that Chinese tax authorities need to take steps to “protect our country’s right to taxes.” According to observers, Circular No. 85 can be viewed as further evidence of the tax authorities’ focus on investigation and APAs. In response to this position, enterprises may want to consider whether an APA would be beneficial to their tax situation and, if so, to prepare the strongest supporting documentation as possible.

For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services group in China:

Steven Tseng, Partner-in-Charge, Global Transfer Pricing Services, China and Hong Kong SAR, and Asia Pacific leader, +86 (21) 2212 3408, steven.tseng@kpmg.com.cn

To print a copy of this TaxNewsFlash article, go to: File>Print>Preferences or Properties>Landscape.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

© 2009 KPMG Huazhen, a Sino-foreign joint venture in the People’s Republic of China and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

The KPMG logo and name are trademarks of KPMG International.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.

The information contained in TaxNewsFlash-Transfer Pricing is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Direct comments to US-KPMGWNT@kpmg.com. For more information, contact KPMG’s Federal Tax Legislative and Regulatory Services Group at + 1 202.533.4366, 2001 M Street NW, Washington, DC 20036-3310.

To unsubscribe from TaxNewsFlash-Transfer Pricing, reply to US-KPMGWNT@kpmg.com and type ‘Transfer Pricing Unsubscribe' in the subject line, then click on the SEND button.

Privacy | Legal