Administrative Regulations for Special Tax Audit Adjustments and Mutual Agreement Procedures (“[2017] No.6”) has come into force on May 1, 2017

After the SAT has released the “Implementation Regulations for Special Tax Adjustments(Trail)” (“[2009] No.2”) in 2009, in order to furtherly regulate the related party transactions, and integrate with the international taxation policies, SAT has released several detailed rules. Recently, SAT releases the “[2017] No.6”, in which it has furtherly stipulated the special tax audit adjustments and mutual agreement procedures. Compared with “[2009] No.2”, “[2017] No.6” has amended and refined the following main aspects:

1. To add the risk characteristics of the enterprises which shall be paid special attention to.

(1) Enterprises with the benefits received do not match with the cost shared;

(2) Enterprises that enter into transactions with related parties located in a country (or region) with low tax rate;

(3) Enterprises with a related party debt to equity ratio which exceeds the threshold stipulated in the relevant regulations.

(4) Enterprises controlled by Chinese resident enterprises and/or Chinese individual residents, and established in a country (or region) where the effective tax rate is lower than 12.5% and that distribute no profits or less profit than they should without reasonable business needs.

2. To add the means to collect electronic data.

(1) Request the information provider to print out electronic data as hard copies with a clear indication of the data source, place of printing, and a remark that it is “certified copy of the electronic data”, and to sign and/or affix a seal on the hard copies.

(2) Store the electronic data in physical devices; copying and sealing up electronic data into read-only storage media by inspectors together with the personnel designated by the party providing the electronic data, and sealed in a package with details of the name of electronic data, data source, creation method, creation time, creator, file format and size, as well as a remark that it is “verified with electronic data recorded in the original storage media”, and for the provider to sign and/or affix a seal.

3. To add the detailed content in the comparability analysis.

(1) For the characteristics of the transacted assets or services, it adds the nature and scope of the services; and the characteristics of financial assets, scope, and risk management.

(2) For the assets used by the parties to the transactions, it furtherly clarifies the asserts include tangible assets, intangible assets, financial assets, etc..

(3) For the contractual terms, it requires the analysis of contractual terms should focus on the ability and behavior of how the enterprises implement the contract as well as the credibility of the signed contractual terms between related parties.

(4) For the economic circumstances, it adds some local specific factors, such as cost saving, market premium and etc..

(5) For the business strategies, it adds the innovation and development, business diversification, operational synergies, risk aversion, and market penetration, etc.

The “[2017] No.6” has also specified the factors on analyzing all kinds of transfer pricing methods, the requirements on analyzing different business modes, the adjustments procedures, the penalty provisions. It is a trial for the SAT to publish the practical administrative rules of the taxation departments.