Tax management over associated transaction enterprises (Part 2)

Question: What are the regulations on methods for determining the price of an associated transaction and expenses to calculate tax in some cases with typical associated transactions?

Answer:

1. Methods for determining the price of an associated transaction

The price of an associated transaction is determined according to one of the following methods:

·The method of comparing the price of an associated transaction with that of an independent transaction.

· The method of comparing the rate of return of taxpayers with that of independent subjects in comparison.

· The method of allocating profits between associated parties.

2. Determination of expenses to calculate tax in some cases with typical associated transactions

· Expenses in associated transactions shall not be deducted from the tax calculating expenses in the period if these expenses do not fit with the nature of independent transactions or do not contribute to the revenue or income from production and business activities of taxpayers.

· For service provision transactions between associated parties, service expenses will not deducted when determining the taxable income. These include: expenses arising from the services provided for the sole purpose of serving the interests of or creating value for other associated parties; services serving the interests of shareholders of an associated party; services which have been charged for many times as multiple associated parties provide the same services, resulting in an inability to determine the added value for taxpayers; services which are a benefit obtained by taxpayers as members of a corporation; and the expenses that the associated party adds to the services provided by a third party through an intermediary as the associated party do not contribute to the values of these services.

· A taxpayer’s total interest for expenses arising in the period quality as a deduction if it is determined that the income subject to corporate income tax does not exceed 20% of the total net profit generated from business activities, plus loan interest expenses and depreciation expenses arising in the period./.