During the recent years, Chinese tax authorities have significantly enhanced their controls on related party transactions and TP investigation.  Many companies are required by their in-charge tax authorities to submit TP documentation within a very short period of time, and are thus put into very disadvantageous positions.  Further, the companies that have not been investigated by the tax authorities should also pay attention to their potential risks in the related party transaction and TP areas, and make appropriate arrangements.

Key TP Considerations

- Pricing Justification: When a company purchases goods from, or sells goods to related parties, the pricing must align with the third-party independent pricing principle. If there is a deviation, justifiable commercial reasons must be provided to explain the difference.

- Royalty and Service Fee Payments: When remitting royalty or service fees to overseas parents or affiliates, companies may consider that the work is done after withholding the applicable taxes and completing the remittance. However, tax authorities may scrutinize the reasonableness of the amount remitted and request further TP-related supporting documents. Failure to provide adequate justification may lead to denying CIT deduction or even more severe actions.

- Share Transfers: During internal restructuring, share transfers between group companies may not be allowed to transfer based on the book value of net assets. Companies may be required to prove the price is the fair market price. This involves conducting market valuations, comparing with similar transactions, and preparing comprehensive documentation to justify the share price.

- Related Party Transactions: Various intra-group transactions, such as fund allocation, people sharing, and office/plant sharing, should also be priced according to TP regulations and subject to relevant taxes like Corporate Income Tax and Value-Added Tax.

Our Services

We use the same TP database as the tax authorities and the Big 4 Accounting Firms, have extensive technical and practical experience, and can provide various types of TP-related professional services to our clients according to their specific needs, such as:

· TP documentation preparation and update on an annual basis

· Assisting in reply to enquiries raised by the tax authorities

· Handling TP challenges or investigation requests raised by the tax authorities