Sept. 1 – Local tax bureaus around the country are scrutinizing outbound royalty payments to related parties overseas, in response to Circular No.363, “Notice of SAT on Reinforcing the Monitoring and Investigation of Cross-Border Related-Party Transactions.”

This circular requires that loss-making, single function entities prepare transfer pricing documentation for the years in which they incurred losses and to submit this to their local tax bureau before the 20th of June of the subsequent year, regardless of transaction amount.

Tax authorities will also be monitoring taxpayers’ outbound payments to their related parties overseas, especially for royalty payments for services such as use of trademarks, patents and similar billable items.

This practice has been more noticeable within the industries of: contract manufacturing, distributors, contract research and development services. It is recommended that companies involved in providing royalty payments for services rendered by related parties, or the parent company for example, prepare full supporting documentation to anticipate possible requests for clarification from the local tax bureau.

Foreign investors requiring assistance are advised to email Dezan Shira & Associates‘ National Tax Partner, Sabrina Zhang at tax@dezshira.com.