Posted by Jiang Diwei on July 30, 2010 under China Tax | 
Guoshuihan [2010] No. 323 explicitly stipulates, tax authorities should compile statistics and analyze enterprises’ transfer pricing contemporaneous documentation preparing situations in their administrative regions. The circular emphasizes the key point from macro and micro-perspective when tax authorities execute the above mentioned task.
From macroscopical on look, tax authorities should explain what kind of sampling method they adopted; in whole sampled enterprises the respective percentage of those enterprises whose related party transactions amount regard to purchase/sale exceeding CNY 200,000,000 and other related party transactions amount over CNY 40,000,000; the respective percentage of enterprises in tracing managing period, with thin capital, with cost sharing agreement, and bearing loss with limited functions and risks. Besides, tax authorities should gather statistics on the enterprises’ various approaches to prepare contemporaneous documentation, mainly inspecting whether they relied on the aid of intermediary organ and which organs were entrusted. In particular, tax authorities should clarify the percentage on preparing contemporaneous documentation of Big Four, domestic firms, foreign firms and enterprises themselves respectively.
From micro-perspectives, according to five detailed requirements on contemporaneous documentation preparing in the special tax adjustment implementation regulation, tax authorities should evaluate the first four aspects from three ranks, in particularly as detailed description, incomplete information and no data; For the fifth aspect, the selection and using of transfer pricing methods, should be gathered statistics from the percentage of five frequently-used transfer pricing methods.
In concrete practice, tax authorities should evaluate the sampled enterprises’ contemporaneous documentation preparing situations from the four levels, including good, ordinary, poor and very poor. They also compile statistics in different ways on preparing contemporaneous documentation for enterprises in each level. Combined with certain analysis in macro-on look part, tax authorities can assess the quality of tax services by intermediary organs, as so to provide guidance for those enterprises who are intent to trust an intermediary organs when prepare contemporaneous documentation.
Posted by Jiang Diwei on July 23, 2010 under Laws and Regulations |
Recently, Company A, which registered in Barbados, transferred its holding equity, of which certain real estate company in Xuzhou, to Company B which registered in China at a premium. According to bilateral tax treaty between China and Barbados, income of the transfer should be levied by resident country. As a result, company A filed its applications to National Tax Bureau in Xuzhou on the purpose of enjoying the treatment of tax treaty. National Tax Bureau in Xuzhou considered company A was a conduit company through inspection, which was inconformity to the conditions of tax exemption by tax treaty. The tax bureau required company A to prove itself beneficial owner and having effective management according to circular 601 and Chinese new enterprise income tax law respectively. After rounds of negotiation, company A could not offer valid proof throughout, as a result, company B withheld non-resident enterprise income tax on the equity transfer for company A.
Xuzhou case is another sample which shows the tax authority’s determination in anti-avoidance since the issuing of circular 601. Regardless of the rationality of the circular, it is arguable that whether tax authority properly dealt with the case.
First of all, there was defective on application of law. According to the rules of validity of laws, when applying laws concerned tax, the validity of international treaty is usually ranked higher than the domestic regulation. Therefore, it should be followed bilateral tax treaty to decide that whether Company A can enjoy the tax treatment, rather than Chinese enterprise income tax law or any provisions in circular. In this case, tax authority applied general anti-avoidance standards according to domestic law in order to make judgment that company A could not be classified into the privileges beneficiary, which should be deemed as breaching rules of law application.
Secondly, whether company A can be defined as a resident enterprise in Barbados should be determined by bilateral treaty or domestic law in Barbados, rather than Chinese law. While the bilateral treaty stipulates that, residence of the contracting country means that according to the domestic laws of contracting country, someone who has the obligation for tax to contracting country, in consideration of the place of residence, dwelling, head office, effective management or other similar standards. Company A has already provided the proof for resident tax payer in Barbados, which has satisfied the conditions of being a tax privilege at least in formality. On some degree, it is with doubt that tax authority identifies company A as a non-residence enterprise in Barbados based on Chinese law is legal and rational.
After all, there are two issues needed to be paid attention to when observing Xuzhou case.
As first, when should the taxpayer identify as a beneficial owner? Circular 601 requires it at the time when residence enterprise of contracting country applies for enjoying the treatment in aspects of dividends, interests, loyalties and etc. While how to understand the word etc, and whether it should include property entitlements, both of which have not yet been final concluded. More or less, observing from the attitudes when tax authority deals with relative issues, circular 601 should apply to property entitlements and other incomes.
In additional, circular 601 objectively exempts the tax authority’s proving obligation, which is equivalent to conversion of burden of proof. As stipulated in circular 601, when tax payers apply to enjoy the treatment of tax treaty, they should prove themselves beneficial owners. On these grounds, tax authorities actually shift their proving obligations to taxpayers, and make it harder for taxpayers to apply for the privileges.
