Effective Transfer Pricing Strategies During Covid-19

Serve market entities and effectively respond to the challenges of the Covid-19 pandemic on transfer pricing 50th SGATAR Annual Meeting Cheng tan People s Republic of China 26-October, 2021

contents 1.Transfer pricing response to Covid-19 pandemic 1.1 Comparability analysis 1.2 Transfer pricing investigation 1.3 Collection management 1.4 Government assistance 2.Advance pricing arrangement 3.Use information technology to improve transfer pricing

1.Transfer pricing response to Covid-19 pandemic 1.1 Comparability analysis 1.1.1 The impact of the pandemic on companies in different industries varies greatly. It had a greater impact on companies in some industries, but also brought new development opportunities to others. When conducting transfer pricing audits, tax authorities will follow the Arm s length principle and consider the impact of the pandemic on related transactions of enterprises case-by-case.

1.Transfer pricing response to Covid-19 pandemic 1.1 Comparability analysis 1.1.2 In the transfer pricing investigation, the tax authorities will fully consider the losses caused by the COVID-19 pandemic. Tax authorities will consider the impact of the pandemic on companies in transfer pricing investigations in combination with factors such as functions and risks, characteristics of related-party transactions and industries, as well as comparable enterprise conditions.

1.Transfer pricing response to Covid-19 pandemic 1.1 Comparability analysis 1.1.2 For the related expenditures incurred due to the pandemic prevention and control or the increased operating expenses due to the impact of the pandemic, the tax authorities will take into account the commercial arrangements reached between independent parties on how to allocate such costs and expenses in the comparability analysis, and make proper adjustment.

1.Transfer pricing response to Covid-19 pandemic 1.1 Comparability analysis 1.1.2 For the related expenditures incurred due to the pandemic prevention and control or the increased operating expenses due to the impact of the pandemic, the tax authorities will take into account the commercial arrangements reached between independent parties on how to allocate such costs and expenses in the comparability analysis, and make proper adjustment. It is recommended that companies clearly quantify and divide such costs and expenses, and retain relevant evidence for future reference.

1.Transfer pricing response to Covid-19 pandemic 1.2 Transfer pricing investigation As for promoting accurate law enforcement and improving the unity and standardization of tax law enforcement; we issued the internal work guidelines for handling special tax adjustment national joint investigation cases (Trial), continuously improved the "management service and investigation" anti-tax avoidance prevention and control system and the "1 + 3 + N" anti-tax avoidance cooperation system.

1.Transfer pricing response to Covid-19 pandemic 1.3 Collection management According to the relevant provisions of Article 14 (4) of the Public Notice on Matters Regarding Refining the Filing of Related Party Transactions and Administration of Contemporaneous Transfer Pricing Documentation (Public Notice of the State Administration of Taxation [2016] No. 42), companies should explain in detail the specific impact of the pandemic on related transactions, value chains, and other aspects when preparing local files. When conducting comparability analysis, they can focus on the data of comparable companies of the same year, region, industry, product, function and risk, so as to reflect the impact of the pandemic on the profit level of the industry.

1.Transfer pricing response to Covid-19 pandemic 1.4 Government assistance During the pandemic period, the Chinese government introduced a series of aid policies in terms of rent, taxes, financing and etc. The impact of government aid policies on transfer pricing arrangements may be mainly reflected in comparability analysis. If taxpayers believe that government aid policies have an impact on transfer pricing arrangements, they should provide relevant information in their transfer pricing documents to support transfer pricing analysis. The tax authorities will follow the arm s-length principle, identify comparable factors, and ensure the fairness and consistency of the results of the comparable analysis.

2.Advance pricing arrangement 2.1 Newly applied APA In order to provide enterprises with tax certainty and promote the liberalization and facilitation of cross-border trade and investment, tax authorities will normally accept enterprises' advance pricing arrangements during the pandemic period. It is recommended that taxpayers submit applications and materials online or by mail through "contactless" methods, and conduct cloud consultation meetings in the form of telephone conferences and video conferences.

2.Advance pricing arrangement 2.1 At the same time, in order to improve the efficiency of application processing, it is recommended that enterprises actively cooperate with tax authorities to provide relevant information in a timely, accurate and complete manner. Tax authorities will also take relevant measures to continuously improve the level of refined and personalized services, and increase the efficiency of taxpayers' access to tax certainty.

2.Advance pricing arrangement 2.2 APA signed and in execution If the company does have a substantial change that affects the implementation of the advance pricing arrangement due to the pandemic, it can report to the tax authority in written form, explaining in detail the impact of the pandemic on the implementation of the advance pricing arrangement and attach relevant materials.

2.Advance pricing arrangement 2.2 The tax authority shall analyze and assess the extent to which the substantial changes brought about by the pandemic have affected the advance pricing arrangements. For unilateral advance pricing arrangements, the tax authority may negotiate with the taxpayer to revise or terminate the advance pricing arrangements. For bilateral/multilateral advance pricing arrangements, the in-charge tax authority shall report to the State Taxation Administration for coordination, and the State Taxation Administration shall negotiate with the competent authority(ies) of other contracting jurisdiction(s) of the tax treaty(ies).

2.Advance pricing arrangement 2.3 Introduction of unilateral APA to simplify the process In July 2021, the State Administration of Taxation issued the public notice on matters related to the application of simplify procedures for unilateral Advance Pricing Arrangements (Public Notice of the State Administration of Taxation [2021] No.24). By simplifying the negotiation process of unilateral advance pricing arrangements, it greatly shortened the time for multinational companies to sign APA with tax authorities, improved negotiation efficiency, Reduce the cost of tax collection and improve the tax certainty. It has been widely concerned and warmly praised by multinational enterprises.

3.Use information technology to improve transfer pricing By optimizing international tax collection and management matters and business processes, improving classified management and a new supervision mechanism based on "credit + risk", we can achieve accurate supervision; Take the cross-border profit level monitoring system as the starting point to realize the electronic data collection of cross-border connected transactions. Deepen the utilization of cross-border transaction data and form a reference and replicable analysis template for key industries.

3.Use information technology to improve transfer pricing Strengthen the effectiveness of management, change the one- sided in the past, and make the case selection more accurate and the investigation more effective.Maintain a unified data assets and knowledge map, sort out the connection and labeling system centered on the core object of international tax business, and gradually form a related, integrated, systematic and intelligent international tax knowledge map.Starting with the promotion of differentiated tax compliance risk classification response, efforts are made to promote the standardization of tax compliance.

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