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LEGAL: Announcement On Special Tax Investigations, Adjustments And Mutual Agreement Procedures (PART 1)
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Announcement On Special Tax Investigations, AdjustmentsAndMutualAgreementProcedures

(PART 1)

BT 201708 LEGAL 032017 年 3 月 17 日,国家税务总局(以下简称"税务总局")发布了《国家税务总局关于发布的公告》(简称"6 号公告"),明确了特别纳税调整的风险管理、立案调查调整、复议及相互协商程序相关规则及处理等事项。6 号公告自 2017 年 5 月 1 日起施行。《特别纳税调整实施办法(试行)》(简称"2 号文")相关规定及其他若干相关法规同时废止。
6 号公告开宗明义提出要加强对企业关联交易相关的利润水平的监控,通过特别纳税调整监控管理和特别纳税调查调整,促进企业税法遵从。一方面,6 号公告规定了一整套实施特别纳税调查调整的程序,包括:重点关注企业及调查立案,调查程序,提交资料及举证,结案及税款缴纳,以及国际救济程序—相互协商程序。6 号公告也重申了关于企业自行调整的相关规定。另一方面,6 号公告规定了与特别纳税调查调整相关的方法等实施细则,包括:转让定价方法,股权转让的转让定价管理,无形资产的转让定价管理,劳务的转让定价管理,以及一些特殊交易或事项的特别纳税调整方法(如来料加工、隐匿关联交易、抵消关联交易等)。
6 号公告强调了针对无形资产和集团劳务等关联交易的转让定价管理,并明确了若干调查调整方法和原则。纳税人对此需要加以足够重视,尤其是可能会出现的与集团转让定价政策不尽一致的地方,必要时对相关政策及时调整。


On 17th March 2017, the State Administration of Taxation ("SAT") issued Announcement on Special Tax Investigation, Adjustment and Mutual Agreement Procedures ("Announcement 6") to step up and enhance administration on transfer pricing, adding to the framework of Announcement 42 and Announcement 64.
Announcement 6, effective from May 1st, 2017, will replace Chapter 4, 5, 11 and 12 of Circular 2, Circular 363, Announcement 54, Circular 188 and Announcement 16.


A comparative study will be performed in the below sections by comparing and contrasting the similarity and differences of the aforementioned circulars and announcements.

BT 201708 LEGAL 01
EXECUTIVE SUMMARY


In order to align with Base Erosion and Profit Shifting ("BEPS") principle of "profits should be taxed where economic activities take place and value is created", Announcement 6 has integrated the topics of intangible assets and intra group services as well as improving the clauses in Circular 2 regarding special tax investigation, comparative analysis and transfer pricing methods and Mutual Agreement Procedures ("MAP").


As a result, Chinese tax authorities are likely to attach greater attention to both the inbound and outbound remittance of royalty fees and intra-group service fees. The determination of contribution level and the corresponding income distribution for the value of intangible assets together with matching principle (i.e. the amount of fees shall match the economic benefits generated from intangible assets and flowed into the enterprise or its related parties) are addressed for royalty fees. On the other hand the concept of 'beneficial services' is introduced and defined in detail with examples.


Announcement 6 also sets forth certain major transfer pricing issues, expands the scope of Special Tax Investigation, clarifies the mindset of judging certain types of related party transactions and updates the procedures and analytical methodology of special tax investigation and adjustment. Furthermore, more detailed MAP is introduced in Announcement 6.


BT 201708 LEGAL 041.SPECIAL TAX INVESTIGATION


Provisions for special tax investigation are included in Article 2 to Article 14, Article 23 to Article 29 and Article 37 to Article 46 of Announcement 6. Comparative study for this section is addressed on the following three aspects:


- More targeted enterprises for special tax investigation
- More detailed methodology for analysis and evaluation of related party transactions
- Increased scrutiny and flexibility for the investigation of special tax adjustment
- Enhanced administrative regulations


(a) More targeted enterprises for Special Tax Investigation
Based on the target enterprises for special tax investigation mentioned in Circular 2, Announcement 6 further expands the target enterprises listed as below:


- Enterprises whose shared benefits are not proportional to the allocated costs;
- Enterprises that have related party transactions with affiliates in countries (jurisdictions) with low taxation;
- Ratio of debt investments accepted by the enterprise from its related parties in proportion to equity investments exceeds the prescribed standards; or
- Enterprises in a country (jurisdictions) where the actual tax burden is less than 12.5% established by a resident enterprise or a resident enterprise controlled by a Chinese individual that is and not distributing profit or distributing less profit due to reasonable business needs.
- Tax planning or tax arrangement of the enterprise lacks reasonable business purposes.


Article 5 specifically mentions that tax authorities are empowered to make special tax adjustments to non-tax resident enterprises.

BT 201708 LEGAL 05
(b) More detailed methodology for analysis and evaluation of related party transactions
Announcement 6 infuses major updates to quantitative and qualitative analysis and evaluation of related party transactions as below:


- Article 23: The tax authorities shall select the party with a relatively simple function as the testing object when analyzing and evaluating the related party transactions of investigated enterprise;
- Article 24: Public information shall be used as a priority by tax authorities in comparative analysis;
- Article 25: More statistical methods are introduced for analyzing and evaluating whether related party transactions are in line with an arm's length principle, including choices of arithmetic method, weighted average method or quartile division method etc. according to the actual situation, to calculate the average or inter quartile range of the profit or price of comparable enterprise on an annual basis or on a weighted average basis for multiple years;
- Article 26: In the absence of comparable enterprise or transaction, tax authorities may make adjustments on the value of materials and equipment that have not been priced by related parties of an enterprise. Tax authorities may make comparative adjustment on the difference of working capital resulted from the value adjustment of materials and equipment. However, tax authorities shall reselect a comparative enterprise when the adjustment of profit level exceeds 10%.
- Article 27: When analyzing and evaluating whether the related party transactions of investigated enterprises are in line with an arm's length principle, regional factors such as cost savings and market premium etc. shall be taken into account if the selected comparative enterprise is in a different economic environment of the investigated enterprise. Tax authorities shall select a reasonable transfer pricing method to determine the contribution level of profitability as a result of regional factors.


(c) Increased scrutiny and flexibility for the investigation of special tax adjustment
Similar to Circular 363, Article 28 of Announcement 6 stipulates that enterprises engaged in single production such as tolling or contract manufacturing etc., or engaged in distribution, contracted research and development businesses, shall in principle maintain a reasonable profit level. The aforementioned enterprises shall prepare local files in the loss-making year for supervision and administration by tax authorities, regardless whether the thresholds for contemporaneous documentation have been achieved. Moreover, tax authorities may make special tax adjustments to the said enterprises for their risks and losses resulted from incorrect decision-making, under-capacity, slow-selling products and failure in research and development etc. that shall be borne by the related parties of the enterprises.


In contrast with Article 40 of Circular 2, Article 29 of Announcement 6 not only required tax authorities to make special tax adjustments to restore the offsetting related party transactions as mentioned in Circular 2 but also requested that hidden related party transactions shall be restored and adjusted, if they may lead to a reduction in the overall tax revenue of the state.


Circular 2 merely required the investigated enterprise, its related parties and other relevant enterprises that are comparative enterprises to provide information to tax authorities upon request. Article 6 of Announcement 6 expands the obligation parties to other enterprises that are relevant to the investigated enterprises, for example, customers and suppliers.


Announcement 16 required that all outbound payments to overseas related parties that do not perform any function assume any risk or lack of substantial business activities are not tax deductible when calculating the Enterprise Income Tax payable whereas Article 37 of Announcement 6 allows outbound payments to overseas related parties that do not perform any function assume any risk or lack of substantial business activities but comply with an arm's length principle could be tax deductible. Otherwise, tax authorities may make special tax adjustments to deductible expenses at full amount.


(d) Enhanced administrative regulations
Announcement 6 also supplements some administrative regulations including:


- The following enterprises can be excluded as target for special tax adjustment for the time being by reaching consensus with tax authorities after preliminary discussion, excluding the years and related party transactions that are not covered by the advance pricing arrangement:
- Enterprises that have already submitted the Letter of Intent for Discussing and Signing an Advance Pricing Arrangement to the tax authorities and have applied for retroactive application of advance pricing arrangements for the previous years; or
- Enterprises that have submitted an Application for Renewal of an Advance Pricing Arrangement to tax authorities.
- An enterprise can pay taxes at its own discretion before receiving the Notice on Special Tax Investigation and Adjustment. To pay taxes at its own discretion, an enterprise shall fill in the Tax Payment Form for Self- assessment of Special Tax Adjustment.


Please note that enterprises that are audited for special tax adjustment by tax authorities no longer need to prepare contemporaneous documentation for the 5-year follow-up administration period under Announcement 6 unless they have reached the thresholds as required by Announcement 42.


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