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China: Standardisation of the administration on cost sharing agreements

Khoonming Ho
Lewis Lu
The State Administration of Taxation (SAT) promulgated the Announcement on Standardising the Administration of Cost Sharing Agreements (Announcement 45) on June 16 2015. The Announcement aims to streamline the administration process, as well as strengthen the follow-up administration, so as to improve and standardise the administration of cost sharing agreements.

Announcement 45 has been issued to replace Article 69 of the Implementation Measures for Special Tax Adjustments (Provisional) ('Circular 2'), which originally addressed the administration of cost sharing agreement. The main updates are:

  • Repeal of the 'Reporting to the SAT' requirement of Circular 2, with a new requirement for enterprises to "submit the agreements to the in-charge tax authorities" instead;
  • Requirement for taxpayers signing cost sharing arrangements to file Related Party Transaction Disclosure Forms along with the corporate income tax annual tax returns, regardless of whether the cost sharing agreement is in effect or not; and
  • Repeal of the former process of examination, which has been replaced by strengthened follow-up administration.

The repeal of the 'reporting' and 'examination' process in Announcement 45 is, to a large extent, in line with the mainstream trend of streamlining the national administration procedures. However, this change will shift the focus of the tax authorities more towards follow-up administration and investigation. In practice, to obtain certainty in implementing cost sharing agreements, taxpayers still need to communicate in advance, and reach consensus, with the tax authorities. Applying for an advance pricing agreement (APA) is one practical way to achieve this goal. However, currently the application of a unilateral APA should be reviewed by the in-charge tax authorities and submitted to SAT for final review and approval.

Announcement 45 emphasises the application of the arm's-length principle and the 'principle of costs and benefits being commensurate'. However, the Announcement does not make explicit rules and standards on how to assess whether these two principles are satisfied or not. Specifically, Announcement 45 did not give answers to a series of implementation issues, such as how to determine the arm's-length price, the implications of business tax (BT) and value added tax (VAT) under the cost sharing agreement, the treatment of balancing payments (such as true-ups) of cross-border transactions, among others.

Khoonming Ho (
KPMG, China and Hong Kong SAR

Tel: +86 (10) 8508 7082

Lewis Lu (
KPMG, Central China

Tel: +86 (21) 2212 3421