The Xi’an case serves as a wake up call to multinational companies doing
business restructuring in China. Their business/asset transfers in China
may be subject to transfer pricing adjustments if the transfer price is at
book value rather than fair market value. Moreover, they should be aware
that the PRC tax authorities may use the income method to determine the
arm’s length price of the business/asset transfer.
3. China Confirms a Pilot Advance-ruling
Program for Large Enterprises
In the March 2012 issue of our China Tax Monthly, we reported that the
State Administration of Taxation (“SAT”) was rumored to be preparing an
advance ruling system for China. Recently, the SAT issued public Circular
1453, in which the SAT confirmed that a pilot program for an advance
ruling system will be introduced for large enterprises. The Circular was
issued and effective on 31 December 2013.
As background, an advance ruling system permits a taxpayer to seek a
ruling from the tax authority on the tax treatment of a specific transaction
or structure before entering into the transaction or creating the structure.
In August 2008, the SAT established the Large Enterprise Division to
provide certain taxpayers with special tax services. Even though nothing
in the Large Enterprise Division’s mandate to provide special tax services
specifically called for providing advance rulings, the Large Enterprise
Division has in practice sometimes provided them. However, only a
limited number of qualified large enterprises have been ruled eligible
to receive the special tax services (and thereby gain potential access
to advance rulings). According to a report posted on the SAT’s official
website4, the first batch of enterprises ruled eligible includes 31 stateowned
enterprises, 4 private-owned enterprises and 10 foreign-owned
While advance rulings have sometimes been offered in practice, Circular
145, for the first time, has expressly established the introduction of a pilot
advance-ruling program for large enterprises. Under the pilot advanceruling
program, the in-charge tax authority should issue an advance ruling
on the tax treatment of a contemplated transaction when requested by an
eligible large enterprise.
The details of the pilot advance-ruling program have not been released.
The SAT will likely issue implementing rules later. It is expected that only
a select number of enterprises will be eligible to participate in the pilot