BEPS China: Services Rendered to Any China-Based Entity Must Provide an Economic Benefit

According to a report issued by China-Briefing.com available here (by Dezan Shira & Associates; Legal Editor: Steven Elsinga), the State Administration of Taxation (SAT) indicated on March 18, 2015:

“Services rendered to the China-based entity by the overseas related party must enable the China-based entity to directly or indirectly gain economic benefit. If this is not the case, these expenses may not be deducted.

Specifically, these include:

1. Services irrelevant to the operations of the company
2. Services such as control, management or supervision that are rendered for the purpose of protecting the interests of the company’s shareholders. As the China-based entity is not the beneficiary of these services, these transactions do not comply with the arm’s length principle and are therefore not deductible.
3. Services provided by the related party, that the China-based entity has already bought from another party or has performed itself.
4. Services by the related party that have already been paid for in previous affiliated transactions.
5. Benefits that the China-based entity enjoins as a consequence of being part of a group of companies, but that does not constitute a service rendered by the overseas entity. An example would be that the China-based entity is able to secure better terms for financing by virtue of it being part of a larger group of companies, which would increase the lender’s confidence.
6. Other services that do not provide the China-based entity with any economic benefit.”

According to the report, the new SAT policy also indicates that royalty payments arising from any intangible property by a China-based company to a related party will be disallowed if the related party did not play a role in its creation.

In short, China takes the position that such a transaction does not comply with the arm’s length principle.

Full credit goes to China-Briefing.com available here (by Dezan Shira & Associates; Legal Editor: Steven Elsinga).

Robert Robillard, Ph.D., CPA, CGA, MBA, M.Sc. Econ.
Senior Partner, DRTP Consulting Inc.
514-742-8086; robertrobillard “at” drtp.ca
www.drtp.ca

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