SAT to Strengthen Monitoring on Cross-Border Affiliated Transactions

On July 14, 2009, the State Administration of Taxation issued the Circular on Strengthening the Monitoring and Investigation of Cross-Border Affiliated Transactions (the "Circular"), effective January 1, 2009.  The Circular points out that enterprises set up by multinational enterprises undertaking limited functions and risks within China, such as single-unit production, distribution or contracted R&D entities, shall maintain reasonable profit margins in accordance with the transfer pricing principle of functional risks matching corresponding profits. The Circular provides that if those enterprises with limited functions and risks incur a loss, they must prepare transfer pricing documentation and other relevant materials for such period in the same year in which the loss occurs, and must submit such documentation to the competent taxation authorities prior to June 20 of the next year.  Although the Circular does not specify the consequence of such review by the tax authorities, it is commonly understood that the tax authorities will examine the loss and surrounding factors, and may impose a government-assessed tax amount if the tax authorities determine that the loss was created for the purpose of tax evasion.  It is believed that the Circular will help further regulate the management of special taxation adjustment, and prevent multinational enterprises from transferring business losses from their overseas enterprises to local affiliated enterprises in China.


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