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back to index backCHINAtalk December,  2004

China's intensified efforts to enforce transfer pricing rules

China's State Administration of Taxation (SAT”) released earlier this year a notice designed to enhance transfer pricing enforcement efforts throughout China. The notice, Guoshuifa (2004) 70 (Circular 70”), indicates an increased level of sophistication among Chinese tax authorities in the area of transfer pricing.

The SAT recently has placed much emphasis in the area of enforcing transfer pricing compliance. There are, however, less than 300 anti-tax avoidance personnel in all of China, conducting fewer than 15,000 total audits every year.

Adding to the problems, these personnel do not all report directly to the SAT's Anti-Tax Avoidance Division, and generally do not do well at coordinating efforts among themselves. Competence and experience levels also vary considerably, with a majority only having a basic understanding of transfer pricing issues. Circular 70 provides measures geared towards improving coordination and efficiency among the anti-tax avoidance personnel.

China's transfer pricing rules, contained in Circular 59, provide that review can be conducted on companies that have:

  • Continuing losses (of more than 2 years)
  • Marginal profits or losses with expanded operations
  • Erratic profits
  • Lower than average profit margins within the industry in which the company operates
  • Payment of unreasonable fees to overseas related parties
  • Sudden drop in profits after tax holiday expires

    Circular 70 places emphasis on the first 3 criteria listed above in order to further facilitate targeting of potential audits by field agents. Circular 70 also implies that more resources will be devoted to national transfer pricing audits, audits conducted on foreign invested enterprises with multiple facilities in China, as part of the SAT's efforts to centralize their efforts in order to exert more control over transfer pricing issues. Additionally, Circular 70 requires companies to complete an annual related party transaction report signed by a CPA firm.

    Source: China Alliance China Notes” newsletter – October/November 2004

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