Upcoming Nationwide Transfer Pricing Investigation Against Outbound Service Fee And Royalty Payments

On 29 July 2014, the China State Administration of Taxation (SAT) released an internal notice to the China tax authorities at the provincial levels, in the name of “Notice on Antiavoidance Investigation against Large Amount Outbound Payments” (Circular Shui Zong Ban Fa [2014] No. 146, Notice 146), urging a nationwide investigation against transactions involving “large amounts of inter-company service fee and royalty payments”. Provincial tax authorities are required to immediately start an investigation and report upwards the relevant initial investigation results by the mid of September 2014. There is no doubt that a new wave of transfer pricing audits will be launched based on the investigation results.

Investigation Scope and Target Taxpayers –

According to Notice 146, the scope of the investigation covers inter-company service fee and royalty payments made to overseas affiliates occurred during the 10-year period from 2004 to 2013. Although Notice 146 does not specify the group of taxpayers to be investigated, Foreign Invested Enterprises (FIEs) apparently are the main investigation targets. In the past decade, it is believed that quite a number of FIEs would have inter-company transactions involving large amounts with overseas affiliates and thus the accumulated transaction values could be significant.

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