China: SAT’s formal assessment on service fees and royalty payments
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

China: SAT’s formal assessment on service fees and royalty payments

ho.jpg

lu.jpg

Khoonming Ho


Lewis Lu

In an area of immediate importance to taxpayers, the State Administration of Taxation (SAT) recently instructed tax bureaus across the country to survey and report back in September regarding companies in their jurisdictions which have made service fee or royalty payments to related parties between the years 2004 and 2013; these years are eligible for potential tax adjustments since the statute of limitations for transfer pricing audits is 10 years. In addition, the SAT urged tax bureaus to formally begin registering transfer pricing audits now of companies which engaged in such transactions deemed to be especially suspicious. In terms of focus, the SAT is paying particular attention to a number of specific issues, for example royalty payments made to:

  • entities in "tax haven" jurisdictions; and

  • overseas related parties with few or no functions, and which are therefore perceived to have little economic substance.

Also, cases where the Chinese taxpayer may have made significant contributions to the value of the intangibles, or where the intangibles may have eroded in value since initially being licensed, are receiving close scrutiny.

With regard to services, the SAT is focusing attention to those which:

  • relate to shareholder activities;

  • relate to supervision by the group headquarters;

  • may be duplicative to ones that the Chinese service recipient can or is also performing in-house or are already provided by third parties;

  • may be irrelevant to the Chinese service recipient given its functional and risk profile or business operations; or

  • for which the remuneration is already reflected in other transactions.

Against this background, the issuance of internal directives to actively scrutinise related party service and royalty payments from the SAT's perspective is likely a logical step to take. As a result, it is expected that a significant number of transfer pricing audits with focus on royalties and service fees will be conducted across the country.

For taxpayers, this is an area of immediate concern and action to manage the tax risks arising from service fee and royalty payments. It is recommended that companies review relevant documentation to ensure adequate evidence is in place and assess areas of potential controversy.

Khoonming Ho (khoonming.ho@kpmg.com)

KPMG, China and Hong Kong SAR

Tel: +86 (10) 8508 7082

Lewis Lu (lewis.lu@kpmg.com)

KPMG, Central China

Tel: +86 (21) 2212 3421

more across site & bottom lb ros

More from across our site

Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
HSBC has settled a claim originally worth £240m relating to a failed film tax relief scheme without admitting liability or wrongdoing
Gift this article