The concept of cost sharing agreement (“CSA”) was introduced into the EIT Law as a general principle in 2008.
Under article 41 of the EIT Law, an enterprise and its related parties can share the costs incurred in co-developing or co-obtaining intangible assets and co- providing or co-receiving services. Shared costs that comply with the arm’s length principle can be deducted before tax when calculating taxable income.
Under article 112 of the Implementing Rules of the EIT Law, when a CSA is entered into between an enterprise and its related parties, the shared costs should match the expected benefits, and supporting documents must be provided to the tax authorities on request.
Circular Guo Shui Fa  No. 2 (“Circular 2”), concerning the Implementing Measures on Special Tax Adjustments, issued by the SAT on January 8, 2009, further regulated CSAs by introducing a chapter on their administration. Under Circular 2, CSAs should be filed with the SAT through local tax authorities within 30 days of their signature so the SAT can verify whether they follow the arm’s length principle.
Circular 2 also (i) limits CSAs to group purchasing and marketing activities, (ii) requires that enterprises entering into CSAs prepare the relevant transfer pricing documentation, and (iii) provides that share costs incurred under a CSA are not deductible, among other circumstances,1 if the enterprise operation period is less than 20 years since the CSA was signed.
Due to these strict requirements and review procedure, few Chinese enterprises have used CSAs.
In the context of reforming the government approval system, the State Council released Guo Fa  No.27 (“Circular 27”) on May 14, 2015, to abolish the approval procedure for CSAs.
Following the release of Circular 27, the SAT issued Announcement  No.45 (“Announcement 45”) on June 16, 2015, updating the rules on the administration of CSAs.
Announcement 45’s main highlights:
- Filing obligations
When an enterprise enters into or amends a CSA with its related parties, the enterprise must file the CSA with the relevant tax authority within 30 days of its signature.
Also, when declaring its annual EIT, the enterprise must provide relevant information on the CSA in its reporting forms on annual related party transactions. According to the official interpretation of Announcement 42, once a CSA has been signed, the reporting forms should be filed regardless of whether it has been executed.
- Post-monitoring approach
Likewise, the SAT will strengthen the post-monitoring of CSAs. Under Announcement 45, the tax authorities can make special tax adjustments when the CSA does not follow the arm’s length principle or the cost-benefit matching principle, and enterprises do not make the necessary compensatory adjustments.
Therefore, a CSA no longer needs to be examined and approved by the tax authority before its implementation, and the shared costs are tax-deductible unless the tax authority decides otherwise through a specific procedure.
Despite the change in procedure from approval to filing, an enterprise should still carry out its CSA according to other rules provided in Circular 2. However, as Circular 2 is undergoing further amendments, some changes might affect the administration of CSAs.
CSAs in China need further development. Enterprises and tax authorities are still inexperienced in this area and enterprises entering into a CSA under the new filing system risk facing special tax adjustments. To reduce this risk, however, CSAs could be reached as advance pricing arrangements.
Date of issue: June 16, 2015. Effective date: July 16, 2015.