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



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 (

KPMG, China and Hong Kong SAR

Tel: +86 (10) 8508 7082

Lewis Lu (

KPMG, Central China

Tel: +86 (21) 2212 3421

more across site & bottom lb ros

More from across our site

Barbara Voskamp is bullish on hiring local talent to boost DLA Piper’s Singapore practice, and argues that ‘big four’ accountants suffer from a stifled creativity
Chris Jordan also said that nations have a duty to scrutinise the partnership structures of major firms, while, in other news, a number of tax teams expanded their benches
KPMG has exclusive access to the tool for three years in the UK, giving it an edge over ‘big four’ rivals
But the US tax agency’s advice is consistent with OECD guidance and shouldn’t surprise anyone, other experts tell ITR
A survey of more than 25,000 in-house counsel reveals that diversity initiatives are a high priority when choosing external counsel
The report is aimed at helping 'low-capacity countries', the OECD has claimed
The UK tax agency appears to be going after easier, lower value targets, one lawyer has claimed
Criminal experts have told ITR that the case of Ulf Johannemann emphasises the fine line between tax avoidance and tax evasion
The ATO workers were among nearly 57,000 people who were duped into claiming fake GST refunds, while Kuwait signed a double taxation treaty with the UAE
However, ICAP may not provide the legal certainty of an APA and tax authorities will have limited capacity, experts argue
Gift this article