The State Administration of Taxation (SAT) will use the remainder of the year to drive home the demand for contemporaneous documentation, to increase the number of industry-specific investigations and to update aspects of the country’s tax law.
Later this year the SAT will perform a sample review on 2008 and 2009 transfer pricing documents with the aim of evaluating the consistency of the administration by different local level tax bureaus. The aim is to establish a standardised approach used across the country.
“Increasing the demand for documentation is a way for the authorities to ramp up their arsenal ahead of an expected rise in the number of disputes with taxpayers,” said Stephen Nelson of King & Wood.
Since the beginning of 2010, local level tax bureaus have been actively collecting copies of taxpayer’s documentation.
“This collection drive may have multiple aims including the creation of internal databases, identification of potential audit targets, as well as to urge enterprises to comply with the documentation requirements,” said Spencer Chong at PricewaterhouseCoopers in Shanghai.
The authorities have also confirmed that they will be targeting specific industries for their transfer pricing investigations.
"Transfer pricing has been a big topic for the SAT for a long time," said Larry Sussman of O'Melveny & Myers in Beijing. "Scrutiny is part of day to day business and you know that each transaction is likely to be investigated."
As reported last month on TPWeek, the SAT will be increasing scrutiny of the transfer pricing activity of the country’s automotive and pharmaceutical industries.
The issues within these industries are outbound royalty payments and marketing intangible assets. In addition, the SAT may also investigate the real estate industry, in particular the enterprises which have transactions with related parties in tax havens.
"The car industry survived the recession relatively unaffected and so the SAT know that there is money to be collected from this industry," said Yun Wei of Salans in Shanghai.
The SAT will also enhance its anti-avoidance capabilities by establishing a team of 500 anti-avoidance specialists with a focus on transfer pricing investigation to improve the technical skills of the tax authorities enabling them to handle more complex cases.
Also, to improve the quality of the anti-avoidance work, the SAT will set up a panel review programme in the form of a group of anti-avoidance tax auditors who will jointly review and assess major cases such as national industry-oriented investigations and cross-region investigations on large group enterprises.
It has also been confirmed that two new transfer pricing circulars will be released later in the year.
The first will target the deemed dividend treatment of transfer pricing adjustments on cross-border intercompany transactions, while the other will offer guidance on the characterisation of high new technology enterprises. Presently, the SAT holds a view that given these enterprises’ own significant valuable intangible assets, it is inappropriate to characterise this type of company as contract R&D service providers from a transfer pricing perspective.
The SAT confirmed that it will continue with the efforts from 2009 to promote advance pricing agreements (APA) and mutual agreement procedures (MAP).
“In 2009 seven bilateral APAs and two MAP cases were concluded involving countries such as Japan, Korea, the US, Denmark, and Singapore,” said Chong.
It is estimated that there are 32 bilateral APAs and seven MAP cases on the SAT’s workload.
