Member Article

The State Administration of Taxation revised the Rules for the Administration of Tax on Business Transactions Between Affiliated Enterprises (for Trial Implementation) effect from 22 October 2004. The Rules replace a regulation of the same name issued in 1998 (“1998 Rules”). Expanded scope of application The Rules have a wider scope of application than the 1998 Rules. The Rules are applicable not only to foreign investment enterprises and foreign enterprises but also to any type of enterprise inside China. Revised definition of affiliated enterprises The definition of “affiliated enterprises” is expanded. Under the 1998 Rules, there were eight criteria for determining whether an enterprise was an affiliated enterprise. One of these criteria was that “10% of the enterprise’s total loans are guaranteed by another enterprise”. The 10% threshold has been changed into “10% or more”. One criterion in the 1998 Rules included “other affiliations in terms of interests that involve actual control of the production, operation or transactions of the enterprise, including relationships with family members or relatives”. This criterion has been reworded as follows: “other affiliations that involve actual control of the production, operation or transactions of the enterprise or of affiliation in terms of interests, including relationships with family members or relatives”. Power of tax authorities The power of tax authorities is increased to include transfer pricing investigations. The tax authorities now have the power to carry out on-site investigations in China outside their administrative jurisdiction. They may also send personnel to do overseas on-site investigations. New provisions are added regarding the materials to be provided by enterprises for the audit and investigation of affiliated transactions. The Rules specify the scope of the materials which the tax authorities may require the enterprises to provide and how they must be provided. Transfer pricing adjustment The Rules specify that advanced pricing arrangements are allowed for future business transactions between affiliated enterprises upon approval by the tax authorities (see next article in this China Legal Update). Transfer pricing tax audits, investigations and adjustment should usually be carried out within three years after an audit notification is given to an enterprise. If a transfer pricing audit, investigation and adjustment involves taxable income from previous years, the tax adjustment should normally be made retroactively for the three preceding years and no more than 10 years in maximum in special circumstances.