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Q:
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During the period of investigation, can the investigated enterprises apply for advanced pricing arrangement (APA)?
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It is not advised that the investigated enterprises apply for advanced pricing arrangement during the investigation period, as the intention of negotiation and signing may be rejected by the tax authorities.
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Will the investigation affect the related parties especially the group headquarter?
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The subject to be adjusted under special investigation is the investigated enterprise’s related transactions which are not compliance with the principle of arm’s length, therefore both parties of the transactions will be affected. The group headquarter will be affected if it has related transactions which are not compliance with the principle of arm’s length during the investigation period with the investigated enterprises. Taking transfer pricing investigations as an example, tax authorities may re-determine the nature of the related transactions and adjust transaction prices, which in turn affects related parties’ transaction arrangements and profit levels.
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Whether the adjustment plan is for the transaction or the overall profit?
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The adjustment plan is aimed at enterprise s’ transactions that are not compliance with the arm’s length principle, rather than overall profits. As a result, enterprises are required to break down the financial data into related and unrelated transactions based on different types of businesses.
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What method is usually used in the adjustment plan?
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In terms of methods used, take the transfer pricing investigation as an example, common methods include price-based comparable uncontrolled price method, resale-price method, cost-plus method, and profit-based transaction net profit method, profit split method, etc. On the basis of comparability analysis, the tax authority selects an appropriate transfer pricing method and specifies an adjustment plan. In actual work, the application of the transaction net profit method is more common.
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After a company is subject to a transfer pricing investigation and adjustment, will it be subject to 5-year follow-up management?
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It is stipulated in clause 45 of the State Administration of Taxation on Issuing the Measures for the Implementation of Special Tax Adjustments (for Trial Implementation) that after executing the transfer pricing adjustments to an enterprise, the taxation organ shall administer a 5-year follow-up of the enterprise from the year following the last year of adjustments to the enterprise.
The Measures for the Administration of Adjustments under Special Tax Investigation and Mutual Consultation Procedures cancels the rules of administering a 5-year follow-up, and emphasizes on conducting special tax adjustment monitoring and administration by affiliated tax declaration examination, contemporaneous documentation administration, profit level monitoring or other means. For enterprises that are subject to transfer pricing investigations and adjustments, tax authorities will still implement special tax adjustment monitoring, and the monitoring period is not limited to 5 years.
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What are the legal remedies for enterprises after the implementation of special tax investigation and adjustment?
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After the implementation of special tax investigation and adjustment, enterprises can apply for administrative reconsideration or litigation according to law or apply to start the mutual consultation procedure of special tax adjustment according to the relevant provisions of the tax treaties signed by China.
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