On January 8, 2009, the State Administration for Taxation (SAT) issued the Pilot Implementation Measures for Special Taxation Adjustments, which came into effect on the date of issuance. The Measures integrate and improve the transfer-pricingrelated regulations, rules and circulars under the old corporate income tax system that has been replaced by the PRC Enterprise Income Tax Law (the New EIT Law) that took effect on January 1, 2008, the Implementation Rules for the PRC Corporate Income Tax Law (the EIT Implementation Rules) and other relevant circulars. The Measures will serve as a comprehensive guidance for the tax authorities when they battle tax avoidance acts. The Measures embody the PRC government’s tightened policies on transfer pricing activities and could have a considerable impact on enterprises that are frequently engaged in connected transactions, especially on those that are multinational companies.  

Both the New EIT Law and the EIT Implementation Rules include a chapter on “Special Taxation Adjustments” that provides general rules for, among other issues, transfer pricing adjustments, advance pricing arrangements, cost sharing arrangements, thin capitalization, controlled foreign corporations, general anti-tax avoidance. However, since these rules are still too general to guide efficient regulation on transfer pricing, the SAT issued the Measures.  

The Measures set forth detailed rules for related-party filings, contemporaneous documentation administration, transfer pricing methods, transfer pricing investigations and adjustments, the execution and monitoring of advance pricing arrangements, regulatory rules on controlled foreign corporations, thin capitalization, general anti-tax avoidance, relevant adjustments, international negotiations, and so on.  

The Measures have imposed tightened requirements on enterprises involved in various connected transactions. It will take great resources, including time and money, for these enterprises to meet these burdensome requirements, especially the contemporaneous documentation requirements. Enterprises that fail to properly prepare and submit contemporaneous documents will not be protected from the 5 percent interest penalty and other relevant penalties on special tax adjustments, and tax authorities are more inclined to auditing these enterprises. Therefore, we recommend that enterprises involved in connected transactions seek help from appropriate professional firms expediently in order to duly prepare their contemporaneous documentation.  

The issuance of the Measures reflects the government’s effort to further standardize the rules and procedures for transfer pricing administration among local tax authorities in China. The Measures also provide clearer guidance to taxpayers and the tax authorities on their responsibilities.