Notice issued by SAT to strengthen the supervision and investigation of cross-border related party transactions

To the offices of the state tax bureaus and local tax bureaus of all provinces, autonomous regions, directly administered municipalities and municipalities separately listed on the state plan:

In order to further standardize the management of special tax adjustments and avoid overseas enterprises transferring losses to related parties inside China admidst the background of the financial crisis, according to the Notice issued by the SAT regarding “Implementation Measures of Special Tax Adjustments (Trial Version)” (“Guo Shui Fa [2009] No. 2″), we now clarify certain issues regarding the supervision and investigation of cross-border related party transactions as follows:

1. The entities that are established in China by multinational companies and have limited functions and risks such as those with sole function of production (import processing or toll processing), distribution or contract research and development etc, shall not bear market risk or risks associated with decision-making activities during the financial crisis. Accordingly, these entities shall maintain a reasonable level of profit pursuant to the transfer pricing principle of “functions and risks” commensurate with profitability.
2. If entities with limited functions and risks incur losses, regardless of whether their related party transactions have exceeded the prescribed thresholds (under Guo Shui Fa [2009] No. 2) for contemporaneous documentation, they shall prepare and submit contemporaneous documentation and other related documents to the relevant tax authorities for the year in which they incur losses before 20 June of the following year.
3. The local tax authorities should strengthen supervision of cross-border related party transactions. Specifically, the tax authorities shall focus on investigating the cases where losses (including any potential losses) are shifted from overseas related parties to Chinese entities or where profits achieved by Chinese entities are shifted to tax havens, strengthen the functional analysis and comparability analysis, and select appropriate transfer pricing methods to determine the profitability of the entity under review.

All translations on this site are provided courtesy of Hwuason Lawyers.