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SAT Enhances Transfer Pricing Management for External Payments to Crack Down on Cross-Border Tax Avoidance and Close Tax Loopholes
Date: 2016/9/4 22:31:50 Views:

The State Administration of Taxation (SAT) recently released the Announcement on Corporate Income Tax on Making Payments by Domestic Enterprises to Overseas Associated Enterprises, further specifying the fundamental principles and management requirements for making payments by domestic enterprises to overseas associated enterprises as well as the length of tracing adjustment by tax authorities.

 

As the OECD's BEPS action plan is carried out further, how to make use of the achievements of the action plan has become the recent work priorities of the tax authorities worldwide. At the 9th G20 Summit that ended in November 2014, G20 leaders reached a consensus on how to crack down on international tax evasion and avoidance, which has been part of the international cooperation on tax administration under the framework of G20.

 

According to a head of the SAT International Taxation Department, amid the global efforts to implement the BEPS action plan and crack down on international tax evasion and avoidance, the SAT organized investigations into "high-value external payments" across the country. The investigations show that, as economic globalization and integration go deeper, it is often the case in China that MNCs make irrational payments to their overseas associated enterprises, leading to base erosion and loss of tax revenue. The SAT's strengthening of transfer pricing management for external payments is another move to implement the BEPS action plan and crack down on international tax evasion and avoidance, after it standardized the general anti-tax avoidance management and the administration of corporate income tax on indirect transfer of properties by non-resident enterprises.

 

The Announcement stipulates that domestic enterprises should follow the arm's length principle in making payments to overseas associated enterprises, and present the contracts or agreements signed between the two sides as required by the tax authorities, and the materials that evidence the authenticity of the transactions and are in compliance with the arm's length principle. The Announcement also sets forth four circumstances under which payments are made in violation of the arm's length principle, including: first, making payments to the overseas associated enterprises that fail to perform their functions and take risks, and have no substantial operational activities; second, paying the associated enterprises the service fees for the labor services that cannot deliver direct or indirect economic benefits; third, paying royalties to the associated enterprises that only have the legal ownership of the intangible assets but make no contribution to the value creation; fourth, paying royalties to the overseas associated enterprises for the fringe benefits created by the financing-oriented listing activities.

 

"Another highlight of the Announcement is that the rationality of paying labor rates is analyzed for the first time in China in terms of benefits." According to the head, the labor rates account for a high proportion of the payments made by Chinese enterprises to their overseas associated enterprises, under a wide range of entries. Some of the labor or service items are those not needed by enterprises or cannot deliver direct or indirect economic benefits to them. Given this, the Announcement follows the OECD's logic for analysis of groups' labor services and proposes that analysis on whether the labor services to Chinese enterprises can deliver direct or indirect economic benefits should be conducted in assessing whether the payments of labor rates are in compliance with the arm's length principle, and specifies that the payments made by Chinese enterprises to their associated enterprises for the labor services that cannot not deliver economic benefits to them should not be deducted from the corporate taxable income.


Li Wanfu, director of the SAT Taxation Science Research Institute, said that the Announcement further clarifies the requirements of the tax authorities on making payments by domestic enterprises to their overseas associated enterprises and hints the possible trading risks arising from the non-compliance of the arm's length principle, and therefore, the Announcement will play a positive role in strengthening tax administration, closing taxation loopholes, promoting standardized operations and enhancing tax compliance.


(Source: the Shanghai Administration of Taxation)


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