On 1 April 2017, The State Administration of Taxation (SAT) of China published a Bulletin-6 providing new transfer pricing (TP) guidance and strengthening the Mutual Agreement Procedure (MAP) process. Bulletin 6 is effective from 1 May 2017.
Transfer pricing methods
Bulletin 6 is in accordance with the OECD Guidelines with respect to specified transfer pricing methods and it provides for the comparable uncontrolled price (CUP) method, the resale price method, the transactional net margin method (TNMM), the cost plus method and the profit split method (PSM). Furthermore, Bulletin 6 allows for use of “other methods” where appropriate.
MAP
The detailed provisions of Bulletin 6 include governing the MAP process for transfer pricing (TP) cases. Pursuant to Bulletin 6, taxpayers should apply directly to the State Administration of Taxation (SAT) if they wish to invoke the MAP for their transfer pricing cases.
Inter-company services transactions
SAT Bulletin 6 encompasses the provision of empowerment of tax authorities to refuse a deduction for service fees paid to a related party that does not have particular effect. The Bulletin maintains internationally accepted and OECD sanctioned benefit test.
Intangible property transactions
Bulletin 6 contains the following 5 functions under OECD Guidelines that are relevant in determining the allocation of profits from use of intangible property:
- Enhancement,
- Development,
- Maintenance,
- Exploitation and
- Protection.
Location specific advantages (LSA)
The SAT has applied the LSA concept as a bargaining chip in transfer pricing (TP) negotiations for a number of years. Bulletin 6 incorporates comparability analysis in requiring LSA adjustments. Multinational organizations may face an increasing number of cases where the tax authorities make transfer pricing adjustments based on LSAs.
