Meaning
Administrative regulations issued by the State Taxation Administration establish the tax treatment and documentation requirements for research and development cost sharing between related enterprises. The rules under STA Announcement 2012 No 18 govern how multinational companies allocate technology development expenses to their Chinese subsidiaries. This instrument requires a formal written agreement to be filed with the local tax bureau to justify any deduction of shared R&D expenses.
It applies to all cost-sharing agreements executed by foreign-invested enterprises in China.
Filing Obligation
Submitting the cost-sharing agreement along with the transfer pricing documentation is the primary requirement to secure tax deductions. Under STA Announcement 2012 No 18, the Chinese subsidiary must file the contract within thirty days of execution. Failure to complete this filing results in the automatic disallowance of the allocated expenses for corporate income tax purposes.
Expense Allocation
Calculating the shared costs based on the arm’s length principle ensures that the allocation reflects the actual benefits received. The provisions of STA Announcement 2012 No 18 mandate that the expense distribution must use appropriate allocation metrics, such as revenue or asset ratios. This prevents multinational firms from shifting profits out of China through inflated research charges.
Audit Scrutiny
Verifying the actual research activity conducted by the parent company is the focus of subsequent tax inspections. When auditing transactions governed by STA Announcement 2012 No 18, tax officials examine whether the local subsidiary has received tangible intellectual property rights from the shared development. If the benefit is not demonstrated, the tax deduction is denied.
