SAT to Strengthen Monitoring on Cross-Border Affiliated Transactions
On July 14, 2009, the State Administration of
Taxation issued the Circular on Strengthening the Monitoring and Investigation
of Cross-Border Affiliated Transactions (the "Circular"), effective January 1,
2009. The Circular points out that
enterprises set up by multinational enterprises undertaking limited functions
and risks within China, such as single-unit production, distribution or
contracted R&D entities, shall maintain reasonable profit margins in
accordance with the transfer pricing principle of functional risks matching
corresponding profits. The Circular provides that if those enterprises with
limited functions and risks incur a loss, they must prepare transfer pricing
documentation and other relevant materials for such period in the same year in
which the loss occurs, and must submit such documentation to the competent
taxation authorities prior to June 20 of the next year. Although the Circular does not specify the
consequence of such review by the tax authorities, it is commonly understood
that the tax authorities will examine the loss and surrounding factors, and may
impose a government-assessed tax amount if the tax authorities determine that
the loss was created for the purpose of tax evasion. It is believed that the Circular will help
further regulate the management of special taxation adjustment, and prevent
multinational enterprises from transferring business losses from their overseas
enterprises to local affiliated enterprises in China.
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