When might a special transfer pricing investigation take place in China?

On March 17, 2017, the State Administration of Taxation (SAT) issued Public Notice 6 which provides rules on a variety of topics including transfer pricing investigations and adjustments. 

Public Notice 6 highlights the tax authorities' emphasis on scrutinizing companies' profit levels, and improving companies' compliance with the relevant tax laws through special tax adjustment monitoring and administration as well as special tax investigations and adjustments. 

Public Notice 6 lists nine types of companies as potential investigation targets:

1. Engages in a large amount of related party transactions
2. Incurs long term losses
3. Profits are below industry levels
4. Profit does not match the functional risks assumed by the company 
5. Carries out related party transactions with parties located in low tax jurisdictions
6. Fails to disclose related party transactions or prepare transfer pricing documentation
7. Has thin capitalization issues
8. Companies located in low tax jurisdictions which either do not distribute profits or do so but not on commercial grounds
9. Engages in tax planning or other arrangements with no commercial basis/ reason

With the Chinese tax authorities strengthening their administration and monitoring over special tax adjustments, transfer pricing investigations and adjustments are expected to become more common. In light of this, Dezan Shira advises that companies should pay close attention to the changing transfer pricing environment in China, to review their transfer pricing policies and to make updates if necessary to achieve compliance with the laws.