China: Cross-border payments to foreign related parties

China: Cross-border payments to foreign related parties

Following the March 2015 release of guidance (known as “Announcement 16”) issued by the State Administration of Taxation regarding the corporate income tax treatment on outbound payments to foreign related parties, tax authorities across China have strengthened their administration and review of the tax treatment of taxpayers’ cross-border payments of service fees and royalties. In general, there has not been a noticeable increase in transfer pricing audits, but varying degrees of enhanced efforts by tax authorities present new challenges for taxpayers.

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Among the areas of focus by the tax authorities are:

  • Extensive self-adjustment requests—that is, taxpayers have been asked to self-assess their transactions and make self-adjustments when necessary.
  • Provincial tax authorities in China have been using Announcement 16 to advance their own examination agendas.
  • Provincial tax authorities also have issued their own guidelines as to what type of documents would be considered adequate for satisfying the arm’s length nature and authenticity of transactions.
  • The standards under Announcement 16 are being applied retroactively, to prior transactions.

Read an August 2015 report [PDF 1 MB] prepared by the KPMG member firm in China: Implementation of Announcement 16

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