Administrative guidelines updated for special tax adjustment cases

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The State Administration of Taxation (SAT) has issued the Internal Working Guidelines for Special Tax Adjustments (Trial) (Guo Shui Fa [2012] No. 13) and Working Guidelines for Re-Examination of Major Cases in Special Tax Adjustments (Trial) (Guo Shui Fa [2012] No. 16), which provide guidance for the tax authorities nationwide on handling all types of special tax adjustment cases, including transfer pricing, advance price arrangements, cost sharing arrangements, controlled foreign corporations, thin capitalisation and general anti-avoidance under Chapter 6 of the Enterprise Income Tax Law. The two sets of guidelines came into effect on 1 March.

The full texts of the two guidelines have not been officially released to the public, as they are internal working guidelines for tax bureaus.

bld_taxIt is worth noting that Notice 13 requires all special tax adjustment cases to be reported to the SAT, which must approve the initiation of the case and any final tax adjustments. This reporting process will help to unify the treatment of special tax adjustment cases nationwide.

Notice 13 also requires local tax bureaus to encourage taxpayers to make self-adjustments, but it does not limit the local tax bureaus’ ability to make further adjustments after an enterprise has made self-adjustments.

Transfer pricing adjustments and other special tax adjustments are concepts under the enterprise income tax regime. However, a transaction or a structure that results in the avoidance of enterprise income tax may also result in the avoidance of other taxes such as business tax, value-added tax and land appreciation tax. Pursuant to Notice 13, the enterprise income tax department should notify other relevant tax departments if it discovers taxpayer non-compliance with tax obligations under the jurisdiction of those departments during its investigation of a special tax adjustment case. The other tax departments should also notify the enterprise income tax department when they believe a special tax adjustment investigation should be initiated.

As a specific implementation rule to Notice 13, Notice 16 requires that all “major” special tax adjustments on transfer pricing cases be re-examined by experts appointed by the SAT before the preliminary special tax adjustment is delivered to the taxpayer. Major special tax adjustment cases refer to cases involving an enterprise with a registered capital of over RMB100 million (US$15.7 million) and an annual revenue from its main business of over RMB1 billion, industry-wide investigations and group investigations, and other situations specified by the SAT. The SAT will maintain a database of experts and appoint them to re-examine each major case.

Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Zhang Danian (Shanghai) at Baker & McKenzie by e-mail at: [email protected]