Page 12 - THE SOUTH CHINA BUSINESS JOURNAL
P. 12
PTH Enterprises need to be
aware of one further
Self-adjustment method challenge associated
with self-adjustment
”One method commonly used by MNCs with a method in China: only
subsidiary in China is voluntarily adjustments during one party can make
the annual tax return. Enterprises often do this when a one-sided increase
it faces a high risk of being assessed as suffering in income tax; that
“unreasonable” losses in related party transactions. means it’s very hard for
This is commonly referred to as self-adjustment another party to make a
method or voluntary adjustment method. corresponding decrease.
The consequence for
The legal basis of this method can be found in MNCs is the risk of
Article 3 of “Announcement on Promulgation
of the Administrative Measures on Special Tax double taxation.
Investigation, Adjustment and Mutual Agreement
Procedure” (State Administration of Taxation (SAT) Credit and debit note adjustment method
Announcement [2017] No. 6, Circular 6). Circular
6 stipulates, “if the company receives special tax Enterprises based in the US or EU often make
adjustment risk warnings, or finds that there is a year-end transfer pricing adjustments directly
special tax adjustment risk, it can adjust the tax on through the credit and debit note adjustment
its own.” method. This allows both parties in a related
transaction to make an appropriate year-end
Under this method, an enterprise needs to adjustment, and foreign headquarters commonly
complete a Voluntary Tax Payment Form for recommend it to their Chinese subsidiaries.
Special Tax Adjustment and submit it to the tax
authorities. Later, during tax return season, the While it’s efficient and straightforward, it’s nearly
taxpayer needs to increase their taxable income in impossible to achieve in China.
the Tax Adjustment Schedule.
China’s tight foreign exchange controls make it
Enterprises need to be aware that simply difficult for Chinese subsidiaries to use this method.
making voluntary transfer pricing adjustments The foreign exchange controls prevent China-based
does not necessarily protect them from special subsidiaries from transferring out or receiving the
tax investigations or further adjustments. If the corresponding foreign exchange amount in the
enterprise has not made an adequate adjustment, name of the credit and debit notes adjustment. This
the tax authorities may order an investigation and is because credit and debit note adjustments can’t
impose further special tax adjustments. be matched against receipt and payment terms
regulated by foreign exchange controls.
The importance of accurately evaluating profit
deviation and the adjustment amount is therefore
mission-critical for enterprises using self-
adjustment method.
Enterprises need to be aware of one further
challenge associated with self-adjustment method
in China: only one party can make a one-sided
increase in income tax; that means it’s very
hard for another party to make a corresponding
decrease. The consequence for MNCs is the risk of
double taxation.
10 AMCHAM SOUTH CHINA
aware of one further
Self-adjustment method challenge associated
with self-adjustment
”One method commonly used by MNCs with a method in China: only
subsidiary in China is voluntarily adjustments during one party can make
the annual tax return. Enterprises often do this when a one-sided increase
it faces a high risk of being assessed as suffering in income tax; that
“unreasonable” losses in related party transactions. means it’s very hard for
This is commonly referred to as self-adjustment another party to make a
method or voluntary adjustment method. corresponding decrease.
The consequence for
The legal basis of this method can be found in MNCs is the risk of
Article 3 of “Announcement on Promulgation
of the Administrative Measures on Special Tax double taxation.
Investigation, Adjustment and Mutual Agreement
Procedure” (State Administration of Taxation (SAT) Credit and debit note adjustment method
Announcement [2017] No. 6, Circular 6). Circular
6 stipulates, “if the company receives special tax Enterprises based in the US or EU often make
adjustment risk warnings, or finds that there is a year-end transfer pricing adjustments directly
special tax adjustment risk, it can adjust the tax on through the credit and debit note adjustment
its own.” method. This allows both parties in a related
transaction to make an appropriate year-end
Under this method, an enterprise needs to adjustment, and foreign headquarters commonly
complete a Voluntary Tax Payment Form for recommend it to their Chinese subsidiaries.
Special Tax Adjustment and submit it to the tax
authorities. Later, during tax return season, the While it’s efficient and straightforward, it’s nearly
taxpayer needs to increase their taxable income in impossible to achieve in China.
the Tax Adjustment Schedule.
China’s tight foreign exchange controls make it
Enterprises need to be aware that simply difficult for Chinese subsidiaries to use this method.
making voluntary transfer pricing adjustments The foreign exchange controls prevent China-based
does not necessarily protect them from special subsidiaries from transferring out or receiving the
tax investigations or further adjustments. If the corresponding foreign exchange amount in the
enterprise has not made an adequate adjustment, name of the credit and debit notes adjustment. This
the tax authorities may order an investigation and is because credit and debit note adjustments can’t
impose further special tax adjustments. be matched against receipt and payment terms
regulated by foreign exchange controls.
The importance of accurately evaluating profit
deviation and the adjustment amount is therefore
mission-critical for enterprises using self-
adjustment method.
Enterprises need to be aware of one further
challenge associated with self-adjustment method
in China: only one party can make a one-sided
increase in income tax; that means it’s very
hard for another party to make a corresponding
decrease. The consequence for MNCs is the risk of
double taxation.
10 AMCHAM SOUTH CHINA
