November 29 2021

Answers to questions on anti-tax avoidance during Covid-19 period

Announcement by State Taxation Administration (STA)

  1. The epidemic has had a great impact on the production and operation of enterprises and related transactions within the group. In this case, how to carry out transfer pricing investigation by tax authorities?

STA: The impact of the epidemic on enterprises in different industries varies greatly, bringing great impact to some enterprises in different industries and new development opportunities to others. When conducting transfer pricing investigations, tax authorities will follow the principle of independent transactions and, on this basis, consider the impact of the epidemic on related transactions of enterprises, on a case-by-case basis.

  1. How should tax authorities consider losses caused by the epidemic in their transfer pricing investigations?

STA: Tax authorities will take into account the impact of the epidemic on enterprises in the transfer pricing investigation, taking into account such factors as enterprise functional risk, related party transaction characteristics, industry characteristics and comparable enterprise conditions. For enterprises' additional expenditures due to epidemic prevention and control or increased operating expenses due to the impact of the epidemic, tax authorities will adjust the differences as appropriate in the comparability analysis based on full consideration of the distribution of related costs and expenses among independent third parties. It is suggested that enterprises clearly divide and quantify relevant costs and expenses, and keep relevant evidence for future reference.

  1. What should an enterprise pay attention to when preparing local documents for the same period if the profit level in 2020 changes significantly due to the epidemic?

STA: According to the state administration of taxation on perfecting the same period and related personal data management related matters of announcement no. 42 (2016) the first item (4) of article 14 of the relevant provisions of enterprise in local document preparation, shall specify outbreak the specific impact of related party transactions, the value chain, the comparable analysis, comparable object data for the same year, region, industry, product and functional risks can be focused to reflect the impact of the epidemic on industry profit levels.

  1. Does the government's assistance policy affecting the price adjustment of related party transactions?

STA: During the epidemic, the Chinese government has introduced a series of assistance policies in areas such as rent, taxes and financing. The influence of government aid policies on transfer pricing arrangements may be mainly reflected in comparability analysis. If enterprises believe that government assistance has an impact on transfer pricing arrangements, they should provide relevant information in their transfer pricing documentation to support transfer pricing analysis. Tax authorities will follow the principle of independent transactions to identify comparable factors and ensure the fairness and consistency of comparable analysis results.

  1. How to implement signed reservation pricing arrangements if they are affected by COVID-19?

STA: If it is true that the epidemic has affected the implementation of the reservation pricing arrangement, the enterprise may report to the competent tax authority in written form, explaining in detail the impact of the epidemic on the implementation of the reservation pricing arrangement, and attach relevant materials.

Competent tax authorities should analyze and assess the extent to which material changes brought about by the epidemic will affect reservation pricing arrangements. For unilateral reservation pricing arrangement, negotiate with the enterprise to revise or terminate the reservation pricing arrangement; The arrangement of double-sided (multi-sided) reservation pricing shall be reported to the State Administration of Taxation for coordination at different levels and shall be settled by the State Administration of Taxation and the competent tax authorities of the other contracting party through negotiation.