Transfer Pricing Investigation in China: Understanding the Latest Adjustments

Posted by Reading Time: 5 minutes

By Dezan Shira & Associates
Editor: Tongyu Zhang

New transfer pricing regulations issued by the State Administration of Taxation (SAT), the Measures for Administration of Special Tax Investigation Adjustment and Mutual Agreement Procedures (“the Measures”), came into effect on May 1, 2017.

The Measures consolidate China’s pre-existing regulations regarding self-adjustment and outbound payments with the new transfer pricing laws introduced in June 2016. In addition, the Measures integrate elements of the international BEPS program, such as regulations relating to intangibles, transfer pricing, and mutual agreement procedures, into domestic regulations.

The updates follow a year of substantial reform in China’s transfer pricing regime, bringing it further in line with international standards. The breadth of recent changes will require many taxpayers to review and adjust internal transfer pricing policies regarding affected transactions to keep in compliance with China’s rapidly changing tax landscape.

Expanded scope

Comparing with the prior measures (guo shui fa [2009] No.2), the scope of the special tax adjustment investigation has been expanded, including transfer pricing, cost sharing agreements of enterprises and controlled foreign enterprises, capital dilution, and general anti-tax avoidance. It also states that foreign tax residents can be subject to investigation, especially in cases relating to controlled foreign companies and general anti-avoidance matters.

Related Link IconRELATED: An Overview of Transfer Pricing in China

According to the Measures, tax authorities implementing a special tax investigation will focus on enterprises with the following risk characteristics:

  • Related party transactions with large transaction amounts, or varied types of related party transactions;
  • Long-term losses, low profits, or non-linear profits;
  • The profit is lower than the industry’s level;
  • The profit level does not match the functional risks borne, or the earnings shared do not match the costs shared;
  • Related party transactions with related parties located in low tax countries or regions;
  • Failure to declare related party transactions or prepare contemporaneous documentation pursuant to the provisions;
  • The ratios of debt investments and equity investments accepted from the related parties exceed the stipulated standards;
  • An enterprise controlled by a resident enterprise, or by a resident enterprise and a Chinese resident which is established in a country or region with an actual tax burden lower than 12.5 percent, that does not distribute profit or reduce profit distribution, and such non-distribution or reduced distribution is not due to reasonable business needs; or,
  • Implements other tax planning or arrangements that do not have reasonable business objectives.

Technical details

When analyzing and assessing the related party transactions of the enterprise under investigation, the tax authorities will, in consideration of the functional risks of the respective parties in the transactions, select the party with relatively simple functions as a test target. In the course of such analysis, tax authorities should give priority to the use of public information, but may also use information not made public.

In addition to the five traditional transfer pricing methods listed in the old measures, the new Measures introduce valuation methods (cost, market, and income methods) and the term ‘other methods that can align profits with economic activities and value creation’, which must be both applied consistently with the arm’s length principle.

With the basis of the corresponding BEPS actions, the new Measures modify the regulations regarding the identification and pricing method of intangible assets and services trade between related parties. The Chinese tax authorities usually emphasize the importance of country-specific impacts on pricing when conducting transfer pricing analysis, such as the idea of Local Specific Advantages (LSAs).

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Investigation implementation procedure

The Measures encourage taxpayers to adjust tax payments by themselves before being subject to an investigation. Upon receipt of the special tax adjustment risk warning by the enterprise or discovery of its special tax adjustment risks, the enterprise may take the initiative to make adjustments and top up tax payments through the new “Special Tax Adjustments Self-Payment Form”. The Measures support this by removing the 20 day limit for taxpayers to submit the corresponding-period materials.

Further, the Measures also alter the procedure of the special tax investigation, as well as some requirements for materials and evidence. For example, electronic data can now be regarded as evidence in an investigation. Although the overall structure remains similar, the implementation details of special tax adjustments tend to be more cautious in the new Measures.

Ensuring compliance

Tax authorities in many jurisdictions have been stepping up their monitoring system of special tax adjustments, with areas such as Beijing and Shanghai having started dedicated development of transfer pricing investigation teams since 2009. It is thus in taxpayers’ best interests to conduct regular review of internal transfer pricing policies and to adjust accordingly in a timely manner to maintain compliance.

As special tax adjustments become more frequent and substantial, taxpayers will increasingly seek tax relief or remedies, especially in the form of mutual agreement procedures, petitions for administrative reviews, and administrative litigation. This means that taxpayers will be required to work closely and cooperatively with tax authorities to successfully obtain relief.


China Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Asia, including ASEAN, India, Indonesia, Russia, the Silk Road, and Vietnam. For editorial matters please contact us here, and for a complimentary subscription to our products, please click here.

Dezan Shira & Associates is a full service practice in China, providing business intelligence, due diligence, legal, tax, IT, HR, payroll, and advisory services throughout the China and Asian region. For assistance with China business issues or investments into China, please contact us at or visit us at

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