Determining Transfer Pricing Methods for Software Service Centers
Cross-border software service centers in China rely on Transactional Net Margin Method full cost-plus markups between 5% and 12% with strict benefit testing.
Announcement 6 2017
Meaning
Tax investigations in the jurisdiction follow a regulatory framework that establishes the formal procedures for special tax adjustments. Under announcement 6 2017, the tax bureau outlines how it will conduct audits regarding transfer pricing, thin capitalization and controlled foreign corporations. The instrument defines the rights of the tax authorities to adjust the taxable income of an enterprise that fails to comply with the arm’s length principle.
Audit Initiation
Case selection for a tax audit often relies on data analysis of the related party transaction forms submitted in previous years. When an entity is chosen under announcement 6 2017, the bureau issues a formal notice of tax examination to the taxpayer. This document signals the start of a period where the company must provide extensive evidence to support its tax filings.
Self Assessment
Taxpayers may choose to voluntarily adjust their tax position before a formal investigation concludes. This proactive use of announcement 6 2017 allows a company to pay additional taxes and interest without facing the full weight of a formal adjustment decree. Such a move can potentially reduce the severity of penalties or the duration of the oversight period.
Adjustment Execution
Final decisions on tax adjustments are issued in a formal notice of special tax investigation adjustment. This document details the revised tax basis, the calculated tax underpayment and the applicable interest charges which are linked to the People’s Bank of China loan prime rate plus a five percent surcharge. If the taxpayer disagrees with the findings, the regulation provides a path for administrative reconsideration or litigation in the Chinese court system, though the assessed tax must typically be paid first to secure the right to appeal.
The bureau maintains a tracking period of five years following the adjustment to ensure continued compliance with the new pricing standards.