Transfer Pricing: a 100 million RMB Tax Adjustment Case to a Pharmaceutical Company

Posted by on March 20, 2013 under Transfer Pricing | Be the First to Comment

Beijing municipal office of SAT recently released an article entitled Beijing Municipal Office of SAT Finished the First Transfer Pricing Investigation to a Pharmaceutical Company(the related links: According to this article, the tax authority obtained the company’s overall business structures and related transaction modes through detailed interviews on all departments’ function and risk aspects. Based on analysis of company’s fundamental data, the tax authority eventually worked out a special tax adjustment scheme which contained a 10-year tax adjustment and managed to collect tax over 100 million RMB.
1. Profits shall match with Risks
Generally speaking, profits shall match with risks. The more profits the company gains, the more risks it bears. According to Implementing Measures for Special Tax Adjustments (Trial), enterprises whose profit levels obviously do not match with the functions performed and the risks assumed would be selected to be key targets of transfer pricing audit. Therefore, hwuason lawyers suggest the company adjust the relationship between profits and risks properly in order to avoid potential tax adjustments risks.
In addition, to enterprises who perform processing and manufacturing functions only, they shall not be responsible for any risk and loss incurred due to wrong decision-making, etc. And such companies shall maintain certain level of profit margin pursuant to Article 39 of Implementing Measures for Special Tax Adjustments (Trial).
2. Function and Risk Analysis
The function of a company may vary in related transactions. To be more precise, such functions may include research and development, design, purchase, processing, assembling, manufacturing, stock management, distribution, after sales service, advertising, transportation, warehousing, financing, financial, accounting, legal, human resources management, etc. And the related risks may include research and development risk, purchase risk, production risk, distribution risk, marketing promotion risk, management risk, financial risk, etc.
The function and risk of a company may largely involve its price in related transactions. And such aspect is also a key factor in comparable analysis and may affect the scope and choice of comparable companies. Therefore, it is highly recommended that company pay special attention on function and risk analysis in both transfer pricing investigation and contemporaneous documentation.
3. Potential Risks
(1) Special Tax Adjustment
According to Regulations on the Implementation of Enterprise Income Tax Law of the People’s Republic of China, if the business transactions between an enterprise and its related party violate the arm’s length principle, the tax authority is entitled to make taxation adjustments within ten years after the taxable year when the transaction is conducted. In this case, the tax authority adjusted the company’s related transaction by ten years.
(2) Back Taxes and Late Interests
According to Implementing Measures for Special Tax Adjustments (Trial), the company shall pay overdue taxes and interests after special tax adjustments and such expenses are not allowed to be deducted before enterprise income taxation. In this case, since the adjusting periods are quite long, its late interests may add up to quite a significant number. Therefore, hwuason lawyers suggest company attach great importance to the pricing strategy in related transactions and strictly follow arm’s length transaction principle to avoid potential adjustment risks.
(3) Follow-up Administrations
According to Implementing Measures for Special Tax Adjustments (Trial), tax authority shall conduct follow-up administration activities in five years since the transfer pricing adjustments. Therefore, the pharmaceutical company in this case may be subject to follow-up administrations in five years accordingly.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu ( or Lingyan Hu ( You can visit our website at or our tax blog at

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

Anti-tax Avoidance: Transfer Pricing via Intangible Assets

Posted by on February 26, 2013 under Anti-Avoidance, Transfer Pricing | Be the First to Comment

It is reported that Guangdong Provincial Office of State Administration of Taxation succeeded in dealing with a transfer pricing case about a large retail enterprise after two years investigation. In this case, the tax authority finally adjusted the retail enterprise’s taxable income by increasing 198 million RMB, which leaded to the company paying back taxes amounting to 60 million RMB. In fact, this is the first anti-avoidance case in China concerning intangible assets such as trademark, goodwill, etc. After several rounds of investigations and negotiations, the retail enterprise eventually accepted the adjustments proposed by the tax authority and agreed not to deduct the expenses on goodwill with respect to its related parties, which could amount to over 100 million RMB. After the adjustments, the amount of the retail enterprise’s related tractions decreased by 60% and the enterprise’s profit improved significantly.
1. Long-term losses or low profits may lead to anti-tax avoidance adjustments
In 2009, Guangdong Provincial Office of SAT found that the sales revenues of the retail enterprise kept increasing each year, however, its profits didn’t increase correspondingly. After detailed investigation, the tax authority discovered that the company’s administrative expenses expanded dramatically which resulted in the low profits. In fact, since 2004, the company has made several payments to its foreign related companies via royalties and consulting services fees, which reached 1% of the company’s annual sales income each year. This raised the tax authority’s attention and caused the anti-tax avoidance investigation by the authority.
In practice, long-term losses or low profits are always important indicators which may actually raise the local tax authorities’ attentions. And many anti-tax avoidance cases began with such unusual financial indicators. Therefore, Hwuason Lawyers suggest that company shall pay special attentions to its financial indicators and their relations, such as sales revenue, profits, amount of related transactions, etc.
2. Emphasize on the preparation of contemporaneous documentations
According to Implementation Measures for Special Tax Adjustments (Trial), enterprises shall prepare and provide their contemporaneous documentations on their related transactions to the tax authorities.
Generally speaking, contemporaneous documentations mainly consist of five important parts, namely organizational structure; business operation briefing, related transactions briefing, comparability analysis and selection of transfer pricing methods. Moreover, each of the five parts in such report has a number of detailed requirements. Therefore, contemporaneous documentations actually contain various materials involving all aspects of company’s related transactions. And their preparation process is quite complex and contains many professional analysis which are highly technical.
As for some companies, they are not aware of the importance of contemporaneous documentations. They think they have already submitted the required documents and that is enough. However, on the contrary, contemporaneous documentations are important approaches for tax authorities to acquire necessary information. And tax authorities may rely on these reports to conduct their further investigations if they discover something unusual in the reports. Therefore, we suggest the company attach great importance on the preparation of contemporaneous documentations. And if the company happens to experience unusual changes or huge fluctuations, it shall provide adequate explanations to such phenomenon so as to reduce potential risks of being inspected or adjusted by the tax authorities.
3. Avoid transfer pricing risks via advance pricing arrangements
As we known, it is quite difficult for both companies and tax authorities to precisely assess and decide the value of certain intangible assets. And disputes may easily arise since both parties can hardly reach unanimous agreements on the pricing methods of intangible assets. In order to avoid potential transfer pricing risks and improve the certainty of business operation, Hwuason Lawyers suggest company struggle to reach advance pricing agreements if possible. And we believe that companies are likely to reach such agreements provided with positive attitude and adequate negotiations. In addition, since the provisions of tax laws regulating intangible assets are quite general and ambiguous, we suggest the company to maintain effective communications with the tax authorities and seek tax professionals’ advisories about some uncertain or controversial issues so as to ensure the compliance of related transactions.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu ( or Lingyan Hu ( You can visit our website at or our tax blog at

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

The guidance of transfer pricing and anti-tax avoidance in China was published

Posted by on May 24, 2011 under Anti-Avoidance, Transfer Pricing | Be the First to Comment



The guidance of transfer pricing and anti-tax avoidance in China, edited by Liu Tianyong who is the management partner of Hwuason and a senior lawyer, was published in November 2010. As another masterpiece on researching transfer pricing practice in China, this book analyses the management of transfer pricing and the concrete system of contemporary documentation from tax practice prospective. It interprets the meaning of the articles through the cases to provide reference examples for taxpayers such as enterprises and third parties. This book will have a positive impact on the practice and theoretical study of transfer pricing and anti-tax avoidance theory. Moreover, various practices about transfer pricing in China will be gradually deepened and more active.

Chinese transfer pricing and tax avoidance development process

Posted by on February 18, 2011 under Transfer Pricing | Be the First to Comment

As a corporate management tool, transfer pricing derived from American enterprises in the 20th

century. Transfer pricing issues have gained extensive attention in developed countries, research achievements on transfer pricing system are great as well. Compared with developed countries, transfer pricing and tax avoidance investigation system in China starts relatively later.

The first authority that formulate transfer pricing regulations to foreign-investment enterprises is Shenzhen government. In 1987, Shenzhen issued “Shenzhen special zone foreign-investment enterprise and affiliate transaction taxation administrative provisional measures”, which covers transfer pricing and tax avoidance contents. However, the real proposal promoted the nationwide tax avoidance investigation was submitted in 1987 or 1988 by the deputies of National People’s Congress.

In 1990, SAT launched the first tax avoidance investigation, which focused Fujian and Guangdong province. This investigation discovered two existed tax avoidance methods, one based on Taiwan investment in Fujian province, the other based on Hong Kong and Macao investment in Guangdong province. Most enterprises set multiple account books, and run irregularly and unsteadily, which hindered tax authorities to grasp enterprises’ financial statement. Therefore, in general, tax authorities adopted verification collection methods during tax collection management. At this stage, the legal ground to transfer pricing and tax avoidance investigation was insufficient, tax administrative measures were simple and tax collection management was still in its infancy.

In 1991, “Tax law of PRC for foreign-investment enterprises and foreign enterprises” and its implementing regulations brought in transfer pricing taxation system entirely. From 1995 to 1998, tax authorities and financial departments made relevant adjustments on tax avoidance administration. Since then, from legislation aspect, general legislation frame on transfer pricing and tax avoidance administration has been set up.

From 1998 to 2005, tax avoidance investigation and adjustment was still general administration, many local governments issued index according to traditional planning economy, such as Guangdong 200 cases, Fujian 150 cases and so forth. Local tax avoidance administration was still inexperience.

In 2005, tax authorities issued “Notice on 2005 Tax Avoidance Administration” and stipulated that local transfer pricing including report to settlement all should report to SAT for approval. Since then, transfer pricing and tax avoidance administration became more regular.

With the implement of new EIT and its implementing regulations, SAT issued a series of regulations and measures to regulate transfer pricing and tax avoidance investigation. “Implementation Regulations for Special Tax Adjustments (Trial)” of 2009 was the most systematic regulations. Theses laws and regulations guaranteed the smooth launch of nationwide tax avoidance management during new EIT implementation and provided explicit legal guidance to both tax authorities and tax payers.

2010 is the first year that carry out transfer pricing contemporary documentation according to new EIT. To raise transfer pricing management level and enhance tax avoidance administration, tax authorities launches extensive selective inspection on transfer pricing contemporary documentation to gain overall feedback on transfer pricing contemporary documentation preparation and management and promote contemporary documentation management regularity.

In the future transfer pricing and tax avoidance investigation management, tax authorities will enlarge industry scope and raise the investigation force ulteriorly, which raises higher requirements to enterprises during related party transaction. Meanwhile, tax authorities will make further input on tax avoidance database to provide more reasonable economic analysis foundation and raise the scientific of transfer pricing and tax avoidance investigation. Transfer pricing management and contemporary documentation preparation will be regular obligation of all kinds of investment enterprises, holding enterprises and corporate groups. Whereby, transfer pricing and tax avoidance investigation will face new development, and transfer pricing implementation in China will march toward new progress.

Circular 323 clarifies the key points of statistic and analysis on transfer pricing contemporaneous documentation

Posted by on July 30, 2010 under Latest Regulations, Transfer Pricing | Be the First to Comment

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.