Global Tax Alert (News from Transfer Pricing) | 27 May 2014

China’s Jiangsu provincial state tax authority releases guidance on international tax compliance administrative measures

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Executive summary

On 20 May 2014, China's Jiangsu Provincial State Administration of Taxation (JSSAT) held a conference and roundtable meeting in Yancheng for directors of municipal tax bureaus and representatives of large multinational corporations (MNCs). The conference focused on the guidance in 2014-2015 Administration Measures of International Tax Compliance (the Administrative Measures), issued by JSSAT on 29 April.1

To create a more transparent tax environment, JSSAT clarified its views on the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) report and relevant action plans in the Administrative Measures and summarized certain cases in recently concluded tax audits. In addition, JSSAT shared its major Administrative Measures on international tax to give taxpayers a better understanding of the tax administration practice and improve taxpayers' compliance.

Jiangsu-based MNCs should be aware of recent developments and have a deep understanding of JSSAT's action plans on international tax matters.

Detailed discussion

Views on recent international tax developments

China tax authorities emphasize that market factors shall be fully considered in transfer pricing analysis, including location saving and market premium.

China tax authorities may apply a substance-over-form approach for treaty abuse, and exercise tax jurisdiction to an overseas incorporated enterprise whose actual management is located in China. Invoking general tax anti-avoidance rules, tax authorities may disregard conduit companies that do not have business substance. Through international information exchange mechanisms, China tax authorities may deny treaty benefits for nonresident taxpayers that are lacking substantive business operations and shall grant beneficial ownership.

China transfer pricing embraces the arm's length principle and does not include any safe harbor exceptions. However, JSSAT states that the safe harbor criteria implemented by some developing countries may be quoted as reference when evaluating cross-border related party transactions. For instance, China tax authorities may reference the safe harbor criteria adopted by India for the cost plus method of service charges.

Risk highlights for multinational sources of taxes

China tax authorities emphasize pro-active compliance activities from taxpayers. Based on findings in recent years, JSSAT reminds taxpayers to pay attention to and take compliance actions for the following issues:

  • Mismatch among functional characterization, economic substance and profit levels;
  • Transferring profits through related party overseas payments;
  • Reducing the overall tax burden of the group by means of offsetting transactions;
  • Undertaking “hidden” cost for the benefit of the group but not receiving corresponding compensation;
  • No tax declaration for receiving capital benefits during a company's start-up period;
  • Exporting intangible assets without charge and erosion of the domestic enterprise's profit;
  • No or “less than actual” tax declarations of foreign investment.

Risk areas attracting tax authorities' focus

According to the Administrative Measures, the tax authorities will focus on the following risk areas:

  • Enterprises with long-term losses despite continuously increased capital;
  • Enterprises with volatile profits;
  • Significantly different profit trends among subsidiaries and that of the group as a whole;
  • Enterprises with a low share of the group's system profit;
  • High-tech enterprises whose profit levels do not match the functions undertaken or the risks assumed;
  • Enterprises with abnormal overseas payments;
  • Enterprises assuming limited functions and risks yet incurring losses.

Risk management measures taken by the tax authorities

Risk screening based on a new database

JSSAT has established a tax collection and data management platform that integrates information such as tax filing forms; commercial information from external databases; and information from agencies such as Customs, the Ministry of Commerce, and the Industry and Commerce Department. Using this information, the tax authorities have established five major categories and 43 sub-categories that identify risk indicators for the comprehensive screening of multinational tax risks.

Establishment of a risk assessment framework

Based on a risk screening from the database, the tax authorities rank taxpayers into four risk levels based on their willingness and ability to meet compliance requirements. Enterprises can then be regarded as high-risk, medium-risk, or low-risk. In addition, the tax authority can identify “specific” taxpayers that warrant attention regardless of the risk level assigned.

Risk management principles

The tax authorities will concentrate resources on high-risk and specific taxpayers. The tax authorities have made it clear that all high-risk enterprises will be audited sooner or later. The specific taxpayers will be audited regularly, in an effort to lead such taxpayers to become actively compliant.

Improve the anti-tax avoidance level and strengthen the anti-tax avoidance management

A specialized anti-tax avoidance organization will be established at the provincial tax bureau level, which is responsible for Jiangsu anti-tax avoidance investigations and advance pricing arrangements. Meanwhile, JSSAT will strengthen the management of transfer pricing investigations, thin capitalization, related-party services transactions, the transfer of profit by using intangible assets or financial tools, and general anti-tax avoidance.


Based on the conference held by JSSAT for municipal tax bureaus and large enterprises, it can be inferred that the local tax authorities will carry out relevant tax risk inspection and management work soon. It is recommended that taxpayers pay particular attention to any further developments by JSSAT regarding international tax administration.

It is known that JSSAT focuses on the tax administration of large-enterprise taxpayers and increasingly relies on specialized tax teams. A specialized anti-tax avoidance organization of JSSAT was established in Suzhou. With the establishment of the specialized organization, the provincial-wide anti-tax avoidance cases will be centrally managed. It is expected the JSSAT will take a more uniform approach across different areas of Jiangsu on anti-tax avoidance work and the consistency of audit cases will likely increase as well.

JSSAT is paying more attention to the review of related party services by examining the actual expense details of service providers and recipients, utilizing international tax information exchange mechanisms, reviewing the substance of overseas affiliates and determining the reasonableness of service charges.

Some local tax authorities in Jiangsu have established a database of non-related-party outbound payments. Companies that have a high volume of outbound related-party payments risk being accused of earning greater than arm's length returns relative to the non-related-party observations in the database. In this regard, it is recommended that

taxpayers revisit their existing cross-border charges policies and relevant supporting documentation, evaluate the mark-up rate for services and contracted R&D arrangements, and verify the characterization of outbound payments of service fees and/or royalty fees, to avoid potential tax risk.

In the past, China tax authorities have provided various supports to serve large enterprises with outbound investments. Recently, they have begun to look more carefully into the cross-border tax issues of the enterprises. For instance, Chinese companies with outbound investments provide intangible assets, such as goodwill, trademarks, know-how, customer lists, etc., without charge to overseas affiliates. Accordingly, it is recommended such enterprises revisit their existing cross-border transactions and transfer pricing policies, evaluate charges for exporting intangible assets, analyze compensation for transferring functions out of China, confirm business substance, and prepare contemporary documentation to avoid potential tax risk.


1. Click this link to access the full content of the Administrative Measures:

For additional information with respect to this Alert, please contact the following:

Ernst & Young (China) Advisory Limited, Shanghai
  • Jessica Tien
    +86 21 2228 2115
  • Kana Sakaide
    +86 21 2228 2289
  • Travis Qiu
    +86 21 2228 2941
  • Zhi Bin Yao
    +86 21 2228 3429
  • Il Kook Chung
    +86 21 2228 2697
Ernst & Young (China) Advisory Limited, Suzhou
  • Julian Hong
    +86 512 6763 3269
Ernst & Young (China) Advisory Limited, Beijing
  • Joanne Su
    +86 10 5815 3380
  • Henrik Hansen
    +86 10 5815 3000
  • Takahama Manabu
    +86 10 5815 2834
  • Lillian Du
    +86 10 5815 2606
Ernst & Young (China) Advisory Limited, Shenzhen
  • Enoch Hsu
    +86 755 2502 8287
Ernst & Young Tax Services Limited, Hong Kong
  • Martin Richter
    +852 2629 3938
Ernst & Young (Taiwan), Taipei
  • George Chou
    +886 2 2720 4000 ext. 2735

EYG no. CM4444