Notice regarding the launch of tax anti-avoidance investigations on remittance of substantial amounts of service fees and royalty payments (Shuizongbanfa [2014] No. 146)

On 29 July 2014, the General Office of State Administration of Taxation (SAT) released an internal notification(“Circular 146”) to urge tax authorities at all levels to carry out extensive tax investigations on substantial amounts of service fees and royalties payments made by domestic enterprises to their overseas related parties from 2004 to 2013 (hereinafter referred to as “Investigations”). The key focus is the payments made to tax haven and low tax rate countries.

According to Circular 146, the SAT urges tax authorities at all levels to assess the reasonableness of aforementioned payments based on their business purposes and commercial substance. In particular, the investigations shall be focused on the following service fees and royalties payments:

Service fees

  1. Service fees paid to shareholder for business strategy making, management and supervision activities with respect to the operation, finance and human resources, etc. of a domestic enterprise.

  2. Group management service fees.

  3. Service fees for activities that the payer has the capacity to perform by itself or has already been provided by a third party

  4. Service fees not relevant to or matching with the business functions and risks undertaken by the payer.

  5. Service fees for which the services occurred at the same time of another transaction while the service fees have already been included in the transaction consideration. In this case, the services fees payment should not be duplicated.

Royalties payments

  1. Royalties paid to entities located in tax havens.

  2. Royalties paid to overseas related parties that undertake no or little functions.

  3. Significant amounts of royalties paid for intellectual property (IP) to which the payer has made significant contribution or the value of the IP has been impaired or declined.

The local tax bureaus are required to complete the Investigations and upload the reports to the SAT by 15 September 2014. Anti-avoidance investigation procedures shall be performed on enterprises that are suspected to have anti-avoidance acts.