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Transfer Pricing News: China investigating service and royalty charges of past 10 years

On 29 July 2014, the Chinese State Administration of Taxation issued an announcement ('ShuiZongBanFa 2014 No. 146') to strengthen its investigation on service and royalty charges from overseas related parties during the past ten years from 2004 to 2013.

The investigation focuses on:
1. Service charges for shareholder service, group service, duplicated service, mismatched function, risk or operation, or service which has been charged in other transactions
2. Royalty charges by related parties with no or limited functions, or in jurisdictions with low tax rates, or royalty payments with low value Tax authorities can conduct a special tax audit if they are not satisfied with the taxpayers’ explanation on the related party charges.

Chinese companies who have sent a significant amount of related party services or royalty payments to overseas should review or refine their transfer pricing documentation to ensure sufficient documents are in place to substantiate the rationale of the related party charges.

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