China identifies audit targets

The circular, Guoshuifa [2009] 114, is dated July 27 2009 and also focuses on enhanced tax collection for real estate developers.

Circular 114 was issued as part of a strategy by the tax authorities to meet the 2009 tax revenue target. Its provisions include the following transfer pricing audit targets:

• Enterprises reporting long-term losses or low profitability during periods of expansion

• Enterprises assuming limited functions and risks, such as single-function production, distribution, or contracted research and development that sustain losses

• Hotel chains of four-star hotels (or higher rated hotels) that pay service fees and management fees to foreign parents

• Enterprises in the highway construction industry and pharmaceutical industry

Other anti-avoidance measures in circular 114 include:

• Accelerating assessment of PRC tax residency for overseas incorporated enterprises that are controlled by PRC investment

• Investigating the transfer of domestic equity interests between non-resident enterprises to prevent the abuse of legal forms, tax havens, and tax treaties

The circular also includes directives concerning special tax inspections of nonresident enterprises, including:

• Inspections of the corporate income tax liabilities relating to existing PRC tax laws and relevant tax treaties regarding expatriate employees dispatched or seconded by non-resident enterprises to provide management, design, certification, and consulting services in China

• Inspections of the repatriation of dividends and interest from PRC resident enterprises to non-resident enterprises

• Inspections of key projects contracted by non-resident enterprises

The guidance also focuses on enhanced tax collection with respect to real estates developers, by:

• Putting in place strict controls and administration for each step in a real estate development project’s operation cycle

• Strengthening the final clearance of land appreciation tax by focusing on reviewing and assessing development costs and expenses

Steven Tseng, (steven.tseng@kpmg.com.cn) partner-in-charge, global transfer pricing services, China and Hong Kong SAR, and Asia Pacific leader.