In a long-awaited announcement, China updated its special tax adjustment measures. The Special Tax Investigations, Adjustments and Mutual Agreement Procedures (Announcement 6) integrates elements of the Base Erosion and Profit Shifting (BEPS) transfer pricing work of the Organisation for Economic Co-operation and Development.
It should help taxpayers better understand the focus areas and rationale of Chinese tax authorities when undertaking transfer pricing investigations because it clarifies the country’s position on:
- The arm’s length principle,
- Intangible property transactions,
- Intercompany services transactions,
- Location specific advantages,
- Transfer pricing methods, and
- Various procedural matters, such as mutual agreement procedures (MAPs) under China’s tax treaties.
Moreover, given that Announcement 6 regulates both outbound payments and inbound receipts of royalty and service fees, it appears that the first steps are being taken to administer transfer pricing rules in relation to outbound-investing Chinese multinational enterprises (MNEs), alongside the traditional focus on foreign multinationals.
Major questions linger
Ultimately, key questions remain on how well the Chinese implementation of the BEPS intangibles profit allocation rules reconciles to the approaches taken in other major countries to resolve disputes. MNEs will need to closely monitor these developments and make adjustments to documentation and tax structures and strategies accordingly. Consult with your tax advisor about how to proceed in your situation.