"Special Tax Adjustment" - Tax-related Risks

New "PRC Enterprise Income Tax Law Ordinance," Chapter 6 provides for special tax adjustment.   It includes:  transfer pricing and advance pricing, cost sharing agreements, thin capitalization, controlled foreign companies and so forth.

( A )  Transfer pricing

Transfer pricing refers to the company within the group or between associated enterprises, provides products, labor or property for insider trading prices.

Companies within the group transfer pricing does not necessarily meet the normal market competition by the transaction price.   It is a multinational Group's internal management and international tax avoidance that has a wide range of such uses.    30 years of reforming and opening up, China's foreign taxation is at a great cost.     Multinational companies through transfer pricing in our country, from formation to transfer of profits out, such situation is very common.    The new Enterprise Income Tax Law ( hereinafter referred to as the new tax law ) clearly states:   Enterprise and its business transactions between related parties does not comply with the principle of an independent trading companies or its affiliates to reduce taxable income or income tax, the tax authorities are entitled to a reasonable methods to adjust.    In practice, enterprises in accordance with the method of rational pricing of related party transactions, the tax authorities may not be recognized.    The complexity of transfer pricing taxpayers may face the risk of tax authorities to adjust.

( B )   Controlled foreign companies

Controlled foreign companies are those refer to the new tax provisions of s. 45, by the resident enterprise or resident enterprises and resident individuals control, establishment of the actual tax burden that is lower than the new Tax Law Article 4, paragraph 1, the 50% statutory tax rate country ( region ).     It is not because of the need for reasonable operating profits not distributed or decreases the allocation of foreign enterprises.    For an offshore company Incorporated in tax havens, it uses a low-tax or no tax havens tax advantages, through transfer pricing, intermediary services and other means, transferred some or all of its profits to offshore companies of some countries, to defer taxation that provides long-term accumulation of profits, thereby evading taxes.   Internationally, in many developed countries, in order to prevent the use of tax havens for such as controlled multinational companies, tax avoidance has taken a cancellation postpone for taxation law.
The risk is that the tax-related provisions of the control is not a reasonable understanding of business needs, if the taxpayer cannot prove the foreign company, it does not constitute a substantial control and rational management needs, it faces all year foreign income tax risks.

( C )  Thin capitalization

Thin capitalization are less related companies, in order to achieve the purposes of tax or not to tax, the use of dividends and interest on tax treatment, by different ways of using loans offering or alternative ways of investment or financing.

In many countries, it require enterprises to pay interest for tax deductible, while dividends are not.    Therefore, enterprises are financing for loans.   China's new tax law:  Corporate accepts its related party debt investments and equity investments in excess of the prescribed standards, interest expense incurred and is not in the calculation of taxable income amount.   The Ministry of Finance, State Administration of Taxation, "Related party interest expense on corporate tax deduction standards on tax policy issues notice", the more detailed provisions:-  The actual business expenses paid to related parties, its acceptance and its related party debt the proportion of equity investments are in two cases , namely 5:1 financial enterprises and the other enterprises 2:1.  Enterprise’s actual tax burden is higher than domestic related parties, the actual payment to the domestic interest expense related parties, or if the company tax law and its implementing regulations, it shall in accordance with the relevant provisions, to provide relevant information and evidence that is related to trading activities, to comply with the principle of independent transaction in computing taxable income amount deducted.  Enterprise while also undertaking banking and non-financial businesses, respectively, should use a reasonable method to calculate its actual interest paid to related parties, or other enterprises?   In accordance therewith, the ratio is 2:1 by computing interest tax for allowed deduction.    New law also provides that:  the tax authority should within 10 years since the occurrence, to make such adjustments.

( D )   Cost sharing agreement

Under New Tax Law, the enterprise and its related parties altogether, to provide acceptable labor services, transfer of intangible assets or joint development, should be in accordance with the arm's length principle when calculating the taxable income in apportion.   Implementation regulations of the New Tax Law also added that in order to prevent corporate abuse cost sharing agreement, namely the enterprise and its related parties, in violation of the terms of cost-sharing, calculating the taxable income, its own share of the cost that cannot be deducted ; taxpayers through matching cost and expected return, the cost apportioned for confirmation process.   Cost allocation must prove the necessity of calculating the expected return with reasonableness, expected benefits and costs are matching with high degree, otherwise the tax authorities will entitle to make tax adjustments.

( E )   The provision of contemporaneous documentation

Statutory form states:  Enterprises provide relevant information to the tax authorities are international anti-avoidance management common practice.    The New Tax Law also stipulates that for the tax authorities, the enterprise and its related parties which has related business survey, companies should provide a lot of relevant information in accordance with regulations.   In addition, the New Tax Law also defines the third party that has the responsibility to provide information on related party transactions, namely the enterprise with the related parties and other third parties associated with business-related tax authorities in investigations related business.    It should provide the relevant information in accordance with the regulations.   If companies refuse to provide their business transactions between related parties, to provide false information or incomplete information, it is not comprehensive and does not accurately reflect the actual situation of related party transactions, the tax authorities are entitled to act, according to the law of their taxable income amount for tax adjustments.  Implementing regulations will be subjected to interest and to provide information linking requirements, if the company provides related services in accordance with the provisions of the relevant survey data,, when calculating interest on overdue tax, it cannot add point when calculation .