Transfer pricing management means that the tax authorities, in accordance with the relevant provisions of Chapter 6 of the Income Tax Law and Article 36 of the Collection and Administration Law, review and evaluate whether the business transactions between the enterprise and its related parties (hereinafter referred to as related party transactions) comply with the principle of arm’s length transactions and a general term for investigation and adjustment work.

• Chapter 6 of the Income Tax Law of the People’s Republic of China (PRC);
• Article 36 of the Tax Collection and Administration Law of the People’s Republic of China;
• Chapter 6 of the Regulations of the People’s Republic of China on the Implementation of the Enterprise Income Tax Law of the People’s Republic of China;
• Articles 51 to 56 of the Rules for the Implementation of the Tax Collection and Administration Law of the People’s Republic of China;
• the Measures for Implementing the Special Taxation Adjustments (for Trial Implementation) (Guo shui fa [2009] No 2);
• the Announcement of the State Administration of Taxation on Matters Relating to the Improvement of the Management of Connected Declarations and Contemporaneous Information (SAT Announcement No 42 of 2016);
• the Announcement of the State Administration of Taxation on Matters Relating to the Improvement of the Management of Appointment Pricing Arrangements (SAT Announcement No 64 of 2016); and
• the Measures for the Administration of Procedures for Special Tax Adjustments and Mutual Negotiation (SAT Announcement No 6 of 2017),

and other laws, administrative regulations and departmental rules provide for the management of transfer pricing and anti-avoidance.

On the basis of international rules and in combination with China’s actual situation, the relevant departments have continuously improved the regulations related to transfer pricing management.

• In 1991, China introduced the transfer pricing tax system for the first time.
• In 2001, transfer pricing and special tax adjustments were formally included in the Law of the People’s Republic of China on Administration of Taxation and Collection, but the contents were relatively simple.
• In 2002, the Rules for Implementation of the Law of the People’s Republic of China on Administration of Taxation and Collection further clarified the transfer pricing of related enterprises, business transactions between independent enterprises, pricing principles and methods, and the circumstances, methods and period of special tax adjustments.
• In 2007, with the improvement of legislative technology, the Law on Enterprise Income Tax and its Implementing Regulations made a special chapter on special tax adjustments.
• In 2009, the State Administration of Taxation (SAT) issued the Implementation Measures for Special Tax Adjustments (Trial Implementation) (Guo shui fa [2009] No 2), which provide systematic regulations on special tax adjustments in terms of general provisions, related declaration, contemporaneous information management, transfer pricing methodology, transfer pricing investigation adjustments, reservation pricing arrangements, cost sharing agreements, controlled foreign company management, capital weakness management, general anti-avoidance management, corresponding adjustments and international consultations, legal liabilities, etc.
• In 2015, the SAT attempted to issue the Special Tax Adjustment Implementation Measures (Draft for Public Comments), unsuccessfully, and since 2016, it has revised Document No 2 by issuing normative documents, successively issuing:
1. SAT Announcement No 42 of 2016 to improve the management of related declarations and contemporaneous information;
2. SAT Announcement No 64 of 2016 to improve the management of appointment pricing arrangements; and
3. SAT Announcement No 6 of 2017, introducing for the first time the concept of “Special Tax Investigation Adjustment” to differentiate it from the previous “Transfer Pricing Investigation and Adjustment”, and improving the transfer pricing methodology, transfer pricing investigation adjustment and other contents.

Transfer pricing management mainly focuses on business transactions between enterprises and their related parties. According to Article 109 of the Regulations on the Implementation of the Enterprise Income Tax Law, Article 51 of the Tax Collection and Administration Law and the Announcement of the State Administration of Taxation on Matters Relating to the Improvement of Affiliated Reporting and Management of Contemporaneous Information, the term “affiliates” as used in China’s transfer pricing rules refers to companies, enterprises and other economic organisations that are directly or indirectly owned or controlled by a third party or have other relationships that are linked in terms of interests, such as in terms of capital, operations, purchases and sales, and so forth, or other companies, enterprises and economic organisations with relations in terms of interests.

With regard to control, Chinese law requires that a resident enterprise or a Chinese resident directly or indirectly hold singly more than 10% of the voting shares of a foreign enterprise and jointly hold more than 50% of the shares of the foreign enterprise; or a resident enterprise, or a resident enterprise and a Chinese resident, does/do not meet the foregoing criteria for the proportion of shares held by the resident enterprise or/and the Chinese resident, but it constitutes substantial control over the foreign enterprise in respect of its shares, capital, operation, purchase and sale, and so forth.

With respect to affiliation, there is no need for a 50% or more shareholding requirement under Chinese law, as long as one party directly or indirectly owns more than 25% of the shares of the other party; both parties directly or indirectly hold more than 25% of the shares of the same third party; or the total amount of loan funds between the two parties accounts for more than 50% of the paid-in capital of either party or more than 10% of the total amount of all loan funds of either party is guaranteed by the other party (with independent financial institutions). The other party guarantees (except for loans or guarantees with independent financial institutions) or has other substantial common interests.

Pursuant to Article 111 of the Regulations for the Implementation of the Enterprise Income Tax Law, transfer pricing methods include:

• the comparable uncontrolled price method, which refers to the method of pricing in accordance with the price at which parties to transactions without affiliation conduct the same or similar business transactions;
• the re-sale price method, which refers to the method of pricing in accordance with the price at which merchandise is purchased from a related party and re-sold to a party to transactions without affiliation, less the gross profit on the sale of the same or similar business;
• the cost-plus method – a method of pricing based on cost plus reasonable expenses and profit;
• the net profit method – a method of determining profit based on the level of net profit made by parties to unrelated transactions conducting the same or similar business transactions; and
• the profit-splitting method – a method of distributing the consolidated profits or losses of an enterprise and its related parties among the parties using reasonable criteria.

Article 42 of the Enterprise Income Tax Law provides that an enterprise may propose to the tax authorities the pricing principles and calculation methods for business transactions between it and its related parties, and that the tax authorities will enter into an appointment pricing arrangement after consulting and confirming with the enterprise. In addition, Item 6 of Article 111 of the Regulations for the Implementation of the Enterprise Income Tax Law provides that taxpayers may use other methods of pricing in addition to those listed in the first five items that are consistent with the principle of independent transactions.

The pricing methods are closely contrasted, and the tax authorities can flexibly choose reasonable transfer pricing methods based on comparability analysis according to the actual situation.

There is no mandatory requirement for such measures in China’s laws, but when the tax authorities analyse and assess whether the related transactions of the investigated enterprises comply with the principle of independent transactions, they can choose statistical methods such as the arithmetic average method, weighted average method or quartile method according to the actual situation, and calculate the average or quartile range of the profits or prices of the comparable enterprises year by year or on average for more than one year.

According to Article 15 of the Measures for the Administration of Adjustment and Mutual Negotiation Procedures for Special Tax Investigations, the tax authorities shall conduct a comparability analysis when implementing transfer pricing investigations. The comparability analysis generally includes five aspects:

• the characteristics of the assets or services traded;
• the functions performed, risks assumed and assets used by the parties to the transaction;
• the contract terms;
• the economic environment; and
• the business strategy.

There are provisions on transfer pricing of intangible assets in the Measures for the Administration of Adjustment and Mutual Negotiation Procedures for Special Tax Investigation.

• The comparability analysis links – if the comparable non-controlled price method is adopted, when transferring the right to use or ownership of intangible assets, the category, use, applicable industry and expected return of the intangible assets – the development investment of the intangible assets, the conditions of the transfer, the degree of exclusivity, the substitutability, the degree and period of protection under the laws of the relevant countries, the geographic location, the life span of the intangible assets, the research and development stage, the maintenance, improvement and renewal of the rights, costs and expenses of the transferee, functional risks, amortisation method and other special factors affecting the value of the intangible assets.
• The allocation of intangible asset income should match the economic activities and value contribution. Enterprises that only own intangible assets without contributing to the value of intangible assets should not participate in intangible asset income distribution. In the process of formation and use of intangible assets, enterprises that only provide funds but do not actually perform the relevant functions and bear the corresponding risks should only obtain a reasonable return on the cost of funds.
• The royalties shall match the economic benefits brought by the intangible assets, and if they do not, the tax authorities shall make special tax adjustments to the royalties under statutory circumstances.

China has not yet landed the OECD’s findings of difficult-to-value intangible assets from a legislative perspective.

China recognises cost-sharing agreements. In addition to specific cost-sharing methods, the Announcement of the State Administration of Taxation on Regulating the Management of Cost-Sharing Agreements also stipulates that an enterprise shall, within 30 days from the date of signing (changing) a cost-sharing agreement with a related party, submit a copy of the cost-sharing agreement to the competent tax authorities, and attach a copy of the “Reporting Form on Annual Related Business Transactions of Enterprises in the People’s Republic of China” to the annual enterprise income tax return. The tax authorities shall strengthen the follow-up management of cost-sharing agreements and implement special tax investigation adjustments for cost-sharing agreements that do not comply with the principles of independent transactions and matching of costs and revenues. If, during the period of implementation of a cost-sharing agreement by an enterprise, the actual revenues shared by the participant are not in proportion to the apportioned costs, compensatory adjustments shall be made in accordance with the actual situation. If the participants do not make compensatory adjustments, the tax authorities shall implement special tax investigation adjustments.

Articles 98, 100 and 101 of the Measures for the Implementation of Special Tax Adjustments (for Trial Implementation) provide that where one party to a connected transaction is subject to a transfer pricing investigation adjustment, the other party shall be allowed to make a corresponding adjustment to eliminate double taxation. An enterprise shall file an application for corresponding adjustment within three years from the date when the enterprise or its related party receives the notice of transfer pricing adjustment, and the tax authorities shall not accept the application if it exceeds three years. However, the corresponding adjustment will not be made for taxes already withheld involving the payment of interest, rent and royalties by the enterprise to its overseas related parties.

To date, China has signed three multilateral tax agreements, namely:

• the Multilateral Convention on Mutual Assistance in Tax Administration;
• the Multi-Variable Inter-Authority Agreement on Automatic Exchange of Tax-Related Information on Financial Accounts; and
• the Multilateral Convention on the Implementation of Measures Concerning Tax Agreements to Prevent Base Erosion and Profit Shifting.

In addition, China has signed separate tax information exchange agreements with ten countries, including the Bahamas, the British Virgin Islands, and the Cayman Islands. The OECD released the second round of peer review report on tax information exchange in Mainland China in 2020, which shows that Mainland China has entered into a number of tax information exchange agreements with ten other countries through Double Taxation Agreements (DTAs), Tax Information Exchange Agreements (TIEAs), and Multilateral Mutual Assistance in Tax Administration and Administration (MCAA) treaties. In total, Mainland China has established tax information exchange relationships with 162 countries/regions.

An enterprise may enter into a reservation pricing arrangement with the tax authorities in respect of the pricing principles and calculation methods for the enterprise’s connected transactions in future years in accordance with Article 42 of the Enterprise Income Tax Law, Article 113 of the Regulations for the Implementation of the Enterprise Income Tax Law, Article 53 of the Rules for the Implementation of the Law on the Administration of Taxation and the Implementation of the Special Taxation Adjustment (for Trial Implementation) and Article 46 of the Special Taxation Adjustment Implementation Measures.

The appointment pricing arrangement shall be accepted by the tax authorities of the cities and autonomous regions above the district.

In order to eliminate the problem of international double taxation, Articles 47 to 61 of the Administrative Measures on Adjustment and Mutual Negotiation Procedures for Special Tax Surveys stipulate the mutual negotiation procedures, linking the negotiation of appointment pricing arrangements with the mutual negotiation procedures for transfer pricing. The Article states that, according to the relevant provisions of the tax agreements signed by China, the State Administration of Taxation may, based on the application of the enterprise or the request of the tax authority of the contracting party of the tax agreement, initiate the mutual consultation procedure to carry out consultation and negotiation with the tax authority of the contracting party of the tax agreement, so as to avoid or eliminate the international double taxation caused by the matters of the special tax adjustments. Mutual consultation includes:

• negotiation of bilateral or multilateral reservation pricing arrangements; and
• negotiation of corresponding adjustments caused by the implementation of special tax investigation adjustments by one party to the tax agreement.

Enterprises applying the appointment pricing arrangement are required to fulfil the conditions that (i) the amount of connected transactions occurring in the year is RMB40 million or more; (ii) they fulfil the obligation to make connected declarations in accordance with the law; and (iii) they prepare, preserve and provide the information for the same period as required, and are applicable to the connected transactions for three to five consecutive years starting from the year after the year in which the enterprise submits the formal written application.

Enterprises shall submit a written application report on the appointment pricing arrangement to the tax authorities within three months from the date of receipt of the formal notice of talks from the tax authorities.

Taxpayers who fulfil the conditions may apply to the tax authorities for an appointment pricing arrangement without having to pay dues.

The appointment pricing arrangement applies to connected transactions for three to five consecutive years starting from the year following the year in which the enterprise submits its formal written application.

If the enterprise’s connected transactions in the year of application or previous years are the same or similar to the year to which the appointment pricing arrangement applies, the pricing principles and calculation methods determined by the appointment pricing arrangement may be applied to the assessment and adjustment of the connected transactions in the year of application or previous years upon the enterprise’s application and the approval of the tax authorities.

If a taxpayer fails to submit to the tax authorities an annual report form on the enterprise’s related business transactions in accordance with the regulations, or fails to keep the same period of time or other relevant information, it shall be dealt with in accordance with the provisions of Articles 60 and 62 of the Levy Management Law; if it refuses to provide the same period of time or other relevant information on the related transactions, or if it fails to provide false or incomplete information to truly reflect its related business transactions, it shall be dealt with in accordance with the provisions of Articles 70, 96, 44 of the Income Tax Law and 115 of the Regulations for the Implementation of the Levy Management Law. The refusal to provide relevant information on related transactions such as contemporaneous information or the provision of false and incomplete information that fails to truly reflect its related business transactions shall be dealt with in accordance with Article 70 of the Levy Control Law, Article 96 of the Implementation Rules of the Levy Control Law, Article 44 of the Income Tax Law and Article 115 of the Implementation Regulations of the Income Tax Law. Where special tax adjustments are involved, additional tax and interest may also be required.

The way for taxpayers to avoid legal liabilities is to file complete and truthful relevant information in a timely manner in accordance with the provisions of the tax law.

Taxpayers are required to submit contemporaneous information in accordance with the regulations, which mainly includes organisational structure, production and operation, related transactions, comparability analysis, and the selection and use of transfer pricing methods. If taxpayers do not submit contemporaneous information in accordance with the regulations, they are legally liable according to the aforementioned provisions.

Taxpayers are required to file the main document, the local document, and the special matter document (including the cost-sharing agreement special matter document and the capital weakening special matter document) in accordance with the regulations. In addition, a resident enterprise with one of the following circumstances should file a country report when filing the annual related business transaction report form:

• the resident enterprise is the ultimate controlling enterprise of a multinational enterprise group and the total amount of all types of revenues in its consolidated financial statements in the previous fiscal year exceeds CNY5.5 billion; and
• the resident enterprise is designated by the multinational enterprise group as the reporting enterprise for the country report.

With the improvement of the legislation, especially the issuance of the Measures for the Administration of Special Tax Investigation Adjustment and Mutual Consultation Procedures, the harmonisation of China’s transfer pricing regulatory system with the OECD Transfer Pricing Guidelines has been substantially improved. However, some deviations still exist. For example, the Transfer Pricing Guidelines (2022 edition) have made additional revisions to the Guidelines on the Application of the Transaction Profit Split Method, the Guidelines on the Application of Tax Administration on Intangible Assets Difficult to Value, and the Guidelines on Transfer Pricing of Financial Transactions on the basis of the 2017 edition, but China has yet to introduce corresponding or specific transfer pricing laws and regulations.

The transfer pricing rules do not deviate from the arm’s length principle. The arm’s length principle is the basic principle on which transfer pricing is based, and it is the key for the tax authorities to determine the transfer price to be applied in unconventional transactions. The selection of an appropriate pricing method based on comparability analysis and the elimination of the impact of differences in the conditions of controlled transactions and those of independent enterprises through reasonable and accurate adjustments are precisely the embodiment of the arm’s length principle.

The State Administration of Taxation (SAT) attaches great importance to the four minimum standards of harmful tax competition (involving domestic preferential tax system), prevention of agreement abuse, country-specific reporting and dispute resolution contained in the BEPS project results, and actively promotes their transformation and implementation in China, and has successively issued a series of regulations and normative documents to strengthen the management of anti-avoidance, such as the Measures for the General Administration of Anti-Avoidance, and the Measures for the Administration of Indirect Transfer of Property by Non-Resident Enterprises. Drawing on the nine theoretical achievements involving special tax adjustments in the BEPS Action Plan, the General Administration of Taxation, combined with the domestic practical experience in special tax investigation and adjustment work over the years, supplemented, modified and refined the relevant contents of the Notice of the State Administration of Taxation on the Issuance of Measures for the Implementation of Special Tax Adjustments (for Trial Implementation), and in March 2017 issued the “Administrative Measures for Special Tax Investigation Adjustment and Mutual Consultation Procedures” (the “Measures”), which regulate or update the transfer pricing methodology and special tax investigation adjustments.

In order to fulfil its commitment on minimum standards, the SAT issued the Announcement of the State Administration of Taxation on Matters Relating to the Improvement of Related Matters on Connected Declarations and Contemporaneous Information in May 2016, which clarifies the contents of contemporaneous information and country-by-country reports, and at the same time, combines with the years of anti-avoidance work practice to refine the contents of connected declarations. Appointment pricing arrangement is an effective way to prevent tax disputes and improve tax certainty. China started the practice of appointment pricing arrangement since the late 1990s and has continuously revised and adjusted it according to the development situation, and issued the Announcement of the State Administration of Taxation on Matters Related to the Improvement of the Management of Appointment Pricing Arrangement. China has incorporated BEPS-related results in the negotiation or revision of tax agreements, especially the four minimum standards have been landed one after another in terms of tax agreements, and has also incorporated some non-minimum standard recommendations of BEPS results, such as the inclusion of provisions on the application of tax agreements to tax transparency bodies in the newly negotiated or revised tax agreements with the Congo (Brazzaville), Argentina, New Zealand, Italy, India, and others, the new double-resident enterprise Gabi rules, etc. The implementation of many achievements has led to the continuous improvement of China’s transfer pricing legal framework.

Although China has not yet introduced a domestic policy, China has joined the two-pillar statement in 2021, China’s finance and taxation department has been deeply involved in the BEPS 2.0 project throughout, and the tax department has already indicated that it will steadily push forward the relevant rules to land in China on the basis of a comprehensive analysis. This shows that China is supportive of the BEPS 2.0 project.

The “two-pillar” programme superimposes the contradictory and potentially conflicting rules on the division of taxing rights and new systems such as the single tax system and the formula allocation method on top of the existing rules in the form of common technical standards, which is a compromise programme for making “moderate but significant” changes to the established international tax framework. The potential impacts of BEPS 2.0 on China are mainly reflected in the following aspects:

• the rapid transformation of profit distribution mechanism to formula allocation method;
• the choice of subsidies and tax incentives;
• the step-up of tax transparency;
• the convergence of the global tax base; and
• the impact on the global tax governance tradition.

There are currently no relevant regulations in the PRC concerning this.

The United Nations Practical Manual on Transfer Pricing for Developing Countries has a positive impact on transfer pricing practice in China. For example, the manual provides some guidance on key issues such as valuation of intellectual property rights, the nature and generation of intangible assets and the ownership of assets among entities that are members of a multinational group, which will promote transfer pricing practice in China and provide a further scientific basis for the resolution of some difficult issues. However, the UN Operational Manual also leaves room for improvement, for example, the relevant sections of the manual rarely discuss the valuation of intra-group royalty rates. For developing countries, member entities are usually licensees rather than owners of valuable intangible assets, and it is difficult to analyse the relevant issues thoroughly and provide guidance to developing countries on the issue by discussing in a relatively short space what constitutes a royalty rate in line with the principle of independent trading.

Transfer pricing safe harbours exist in China. The Ministry of Finance State Administration of Taxation Circular on Tax Policy Issues Relating to Pre-tax Deduction Standards for Interest Expenditures by Related Parties of Enterprises (Cai Shui [2008] No 121), and the chapter on Capital Weakness Management of the Implementation Measures for Special Tax Adjustments (for Trial Implementation) stipulate that interest expenditures are not subject to pre-tax deduction. The ratio of financial enterprises accepting creditor investments from related parties to their equity investments is 5:1, and the ratio for other enterprises is 2:1. Interest in excess of this shall not be deducted before tax, and shall be allocated among related parties in accordance with the ratio of the actual interest paid to each related party to the total amount of interest paid to the related parties, among which the interest allocated to the domestic related parties with a higher effective tax burden than the enterprise is permitted to be deducted. The interest paid directly or indirectly to the overseas related parties shall be treated as dividends distributed and subject to enterprise income tax in accordance with the difference between the income tax rates applicable to dividends and interest respectively, and if the amount of income tax withheld is more than the amount of income tax payable on the basis of dividends, the excess shall not be refunded.

This is mainly reflected in Chapter 8 of the Special Tax Adjustment Implementation Measures (for Trial Implementation), the chapter on the management of controlled foreign enterprises. If a resident enterprise, or an enterprise controlled by a resident enterprise and a resident individual, which is established in a country (region) where the effective tax burden is lower than 50% of the level of the tax rate stipulated in Article 4(1) of the Income Tax Law, does not distribute or reduces the distribution of its profits not due to the reasonable needs of its operation, the portion of the said profits attributable to the resident enterprise shall be included in the current income of the resident enterprise.

The formulation of China’s transfer pricing regulations has also taken into account Chinese reality on the basis of international rules. For example, in terms of the requirements for contemporaneous information, compared with the OECD BEPS action plan, there are additional requirements for the main body of transfer pricing documentation and local documentation in China. Another example is that there are difficulties in the practical application of the principle of independent transaction in developing countries, and China recognises the core position of the principle of independent transaction in the field of transfer pricing. However, when the independent transaction principle is considered difficult to be implemented accurately, the Chinese tax authorities do not rule out the possibility of introducing some other principles to analyse transfer pricing cases. A further example is the existence of territorial special factors in China, and in analysing territorial special factors, China adopts the method of identifying the existence of a territorial special factor, confirming whether the territorial special factor generates additional profits, quantifying and measuring that additional profit, determining the appropriate transfer pricing methodology for allocating that profit, which is quite different from the analytical methodology in the OECD Transfer Pricing Guidelines, and so on.

There is no mandatory requirement for the co-ordination of transfer pricing and customs valuation. However, due to the significant differences in the positions, focuses and audit calibers of customs and tax supervision, customs and tax authorities may arrive at different fair price reference standards for the same cross-border connected transaction, and it is very necessary to co-ordinate transfer pricing and customs valuation. Multinational enterprises can take corresponding measures in practice to take into account the different requirements of tax and customs. For example, when Customs conducts valuation investigations on imported goods, it will collect and refer to the contemporaneous information documents submitted by enterprises to the tax authorities. Therefore, enterprises in the preparation of the same period of information documents, especially the process of local documents, can take into account the requirements of the Customs and Excise authorities, taking into account the results of the net profit and gross profit of comparable enterprises, to ensure that the net profit and gross profit are located in a reasonable range of comparable enterprises. If it is indeed impossible to obtain a more satisfactory profit result, based on the relevance and differences of profit indicators, and taking into account the market environment, business cycle, stage of development of the enterprise and other special matters, it is possible to make preparations for the collection of evidence and analysis and explanation in advance.

The tax authorities, based on the Enterprise Annual Affiliated Business Transaction Report Form filled out by the enterprise, summarise, analyse and identify the amount of business transactions between the affiliated enterprises, so as to determine the object of transfer pricing key investigations, and then report to the competent leadership for approval and implementation of the investigation of the enterprise organisation.

Implementation of the Transfer Pricing Audit

• Select cases of transfer pricing, determine the investigated enterprises, and then issue the Notice of Tax Inspection.
• When the tax authorities implement the special tax investigation, they may, in accordance with the legal authority and procedures, adopt the methods of field investigation, access to the information in the account books, inquiries, inquiries into the deposit accounts or savings deposits, issuance of letters of concurrence, offsite investigations, and exchange of international tax information. For the investigated enterprises adopting electronic information system for management and accounting, the tax authorities may require the enterprises to provide relevant tax-related information.
• The information required to be provided by the enterprises shall be issued with a notice of tax matters, and the enterprises may be investigated on-site and the relevant persons may be interviewed, so as to understand the business substance of the enterprises such as functions, risks and assets and to find out the suspected points of tax avoidance.
• After the investigation, if the enterprises’ connected transactions are in line with the independent transaction principle, the tax authorities shall make a conclusion on transfer pricing investigation and serve a Notice of Conclusion on Special Tax Investigation to the enterprise. If it is not in line with the principle of independent transaction, the enterprise shall conduct consultation and negotiation with the enterprise after the formation of the preliminary adjustment opinion, and after the consultation and negotiation, the enterprise shall be issued the Notice of Preliminary Adjustment of Special Taxation Investigation, and the enterprise shall have the opportunity to provide written materials if there are any objections and further explanations of defences within seven days; if there are no objections to the preliminary adjustment opinion, the tax authorities shall issue the Notice of Adjustment of Special Taxation Investigation.
• The enterprise shall be entitled to submit a request for the adjustment of special taxation – according to the adjustment notice issued by the tax authority, the enterprise may request the tax authorities of both countries to carry out the corresponding adjustment and mutual consultation procedures in order to eliminate the double taxation problem arising from the transfer pricing adjustment.

If a taxpayer is not satisfied with the audit result, he/she may file an administrative reconsideration; if he/she is still not satisfied with the administrative reconsideration, he/she may file an administrative litigation with the People’s Court in accordance with the law.

The filing of administrative reconsideration or administrative litigation has the requirement of tax clearance prior to filing, and the taxpayer must pay or discharge the tax, interest, late payment or provide corresponding guarantee before applying for administrative reconsideration and filing administrative litigation in accordance with the law.

Not all administrative cases related to transfer pricing are under the jurisdiction of a single court. Administrative cases are under the jurisdiction of the People’s Court where the administrative organ that initially issued the administrative act is located. Cases subject to reconsideration may also be subject to the jurisdiction of the People’s Court at the location of the reconsideration organ. With the approval of the Supreme People’s Court, the Higher People’s Court may, in the light of the actual circumstances of the trial, determine that a number of people’s courts shall have jurisdiction over administrative cases across administrative districts. Taxpayers enjoy the right to choose to a certain extent. For example, in cases where two or more People’s Courts have jurisdiction, the taxpayer may choose one of the People’s Courts to file a lawsuit. If a taxpayer files a lawsuit in more than two People’s Courts with jurisdiction, the People’s Court that files the case first shall have jurisdiction.

If a party does not accept the first instance decision of a People’s Court, he has the right to appeal to a Higher People’s Court within 15 days from the date of delivery of the judgment. Where a party does not accept a ruling of the People’s Court of first instance, he or she has the right to appeal to a People’s Court of a higher level within ten days from the date of delivery of the ruling. If no appeal is lodged after the deadline, the People’s Court’s judgment or ruling of first instance shall take legal effect. The People’s Court shall form a collegial panel and hold a hearing on the appeal. If, after reviewing the files, investigating and questioning the parties, no new facts, evidence or reasons are put forward, and the collegial panel considers that a hearing is not necessary, it may not hold a hearing. When a People’s Court hears an appeal case, it shall conduct a comprehensive review of the judgment and ruling of the People’s Court of first instance and the administrative act under appeal. A People’s Court hearing an appeal shall render a final judgment within three months from the date of receipt of the appeal. Where special circumstances require an extension, the Higher People’s Court shall authorise it, and where an extension is required for the hearing of an appeal by a Higher People’s Court, the Supreme People’s Court shall authorise it.

On the one hand, China’s tax authorities have strictly enforced the law and stepped up efforts to combat tax evasion, and since 2022, the amount of transfer pricing back-tax revenue has continued to set new historical records. On the other hand, the courts have been fair in administering justice and testing the scientific nature of transfer pricing-related regulations in the course of various special tax adjustment cases. The relevant jurisprudence is the specific application of laws and regulations, as well as the supplementation of transfer pricing rules. However, China has not yet published any official guiding cases or typical cases, and there is relatively little research material on transfer pricing jurisprudence, and the construction of jurisprudence library needs to be further improved.

The authors have not published any official guiding cases or typical cases on transfer pricing, and it is not possible to clarify which cases are the most important and have the most far-reaching impact.

China controls foreign exchange, and payments to non-controlled companies are required to go through the required filing and registration procedures or report information, and to submit to the bank information including contracts (agreements), invoices (payment notices) containing the subject matter of the transaction, the main body, and other elements, or settlement lists (payment lists) listing the subject matter of the transaction, the main body, and the amount of the transaction, and other elements. The bank examines the authenticity and reasonableness of the transaction in accordance with the three principles of business development. Under the current trend of tighter regulation of outbound funds, financial institutions may also submit to a higher-level banking institution for review when large-value outbound payments are involved.

Against the background of foreign exchange control, there are certain restrictions on payments to controlled companies. However, in order to promote the facilitation of trade and investment and serve the real economy, the State Administration of Foreign Exchange issued the Provisions on the Administration of Centralised Operation of Cross-border Funds of Multinational Corporations (Hui fa [2019] No 7), the Provisions on the Administration of Centralised Operation of Foreign Exchange Funds of Multinational Corporations (Hui fa [2015] No 36), and other documents, stipulating that multinational corporations meeting the conditions may, in accordance with the needs of their business operations, select a domestic enterprise as the host enterprise centralised operation and management of funds of domestic and foreign member enterprises, and carrying out one or more of centralised foreign debt line, centralised overseas lending line, centralised collection and payment of current account funds, and rolling difference net settlement.

China applies Chinese law to cases over which it has jurisdiction. Where it has entered into bilateral or multilateral agreements with other countries, it handles cases in accordance with the relevant agreements. In cases over which it does not have jurisdiction, it fully respects the application of the laws of other countries by the countries or regions that do have jurisdiction.

The SAT will publish the Annual Report on China’s Appointment Pricing Arrangement (APA) in both Chinese and English, which will introduce China’s APA implementation procedures and the development of related work. However, both parties are obliged to keep confidential all specific information materials obtained during the negotiation process of appointment pricing arrangement between tax authorities and enterprises. Except for cases where the information should be provided to the relevant authorities in accordance with the law, the tax authorities shall not disclose the information related to the appointment pricing arrangement in any way without the consent of the taxpayer. Similarly, the tax authorities will not disclose the specific results of a transfer pricing audit of a tax subject on their official website.

Enterprise tax-related information usually has a certain commercial value and shall be kept confidential by the tax authorities when the law does not provide for its disclosure. The acquisition of such secret comparable data by others through illegal means may lead to trade secret infringement.