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

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

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 & shared bottom lb ros

More from across our site

New French legislation should create a more consistent legal environment for taxing gains from management packages, say Bruno Knadjian and Sylvain Piémont of Herbert Smith Freehills Kramer
The South Africa vs SC ruling may embolden the tax authority to take a more aggressive approach to TP assessments, an adviser tells ITR
Indirect tax professionals now rate compliance as a bigger obstacle than technology and automation; in other news, Italy approved a VAT cut on art sales
AI-powered tax agents are likely to be the next big development in tax technology, says Russell Gammon of Tax Systems
FTI Consulting’s EMEA head of employment tax and reward tells ITR about celebrating diversity in the profession, his love of musicals, and what makes tax cool
Canadian Prime Minister Mark Carney and US President Donald Trump have agreed that the countries will look to conclude a deal by July 21, 2025
The firm’s lack of transparency regarding its tax leaks scandal should see the ban extended beyond June 30, senators Deborah O’Neill and Barbara Pocock tell ITR
Despite posing significant administrative hurdles, digital services taxes remain ‘the best way forward’ for emerging economies, says Neil Kelley, COO of Ascoria
A ‘joint understanding’ among G7 countries that ‘defends American interests’ is set to be announced, Scott Bessent claimed
The ‘big four’ firm’s inaugural annual report unveiled a sharp drop in profits for 2024; in other news, Baker McKenzie and Perkins Coie expanded their US tax benches
Gift this article