The Chinese tax authorities have recently offered a response to queries regarding transfer pricing (TP) during the COVID-19 pandemic. As year-end is approaching, multinationals are now beginning to evaluate and review the results of their TP policies and official guidance on how enterprises may deal with any TP investigations has now arrived.

The key points are as follows.

Tax investigations by the Chinese tax authorities

The Chinese tax authority has stated that as the pandemic affects industries differently, a particular emphasis on the company’s industry and the effect the pandemic has had on said industry will be a factor. In addition to the relevant industry, the company’s role in (global) supply chains is also crucial. Companies should therefore specifically analyze potential risks with regard to the pandemic and the specific impact of the pandemic at the local level as well as on the group level.

Therefore, when conducting TP investigations, the competent tax authorities shall take into account the pandemic impact on related-party transactions on a case-by-case analysis, while complying with the arm’s length principle.

How to consider the losses caused by the pandemic?

The Chinese tax authorities have mentioned that during the investigation, the impact of the pandemic would be considered in the context of the functions and risks of the relevant enterprises, related-party transactions, the industry, as well as other factors.

It is worth noting that the 2017 Announcement No. 6 stipulates that, simple function enterprises should generally maintain a reasonable profit level, in principle.

However, according to “OECD Covid 19 Transfer Pricing Guidelines”, it is still possible to incur losses in the short term due to the pandemic. Therefore, it is recommended that such enterprises should prepare sufficient supporting documents to avoid potential TP risks in this regard.

Our Observations

The responses from the Chinese tax authorities indicate that the impact of the pandemic on enterprises when conducting TP investigations has been realized and recognized. However, in view of any potential loss caused by the pandemic, enterprises should perform a preemptive analysis on its own, and retain relevant supporting documents.

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