Audits on outbound service fees and royalties to rise in frequency

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Anew notice, PRC Notice 146, requires tax authorities at all levels to participate in a nationwide search for, and investigation of, all large payments of service fees or royalties from Chinese resident enterprises to their offshore related parties. Notice 146 was issued by the State Administration of Taxation on 29 July 2014, but was only released to the public recently. The investigation called for in Notice 146 was scheduled for completion by 15 September 2014.

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Who is affected by the notice?

Foreign invested enterprises (FIEs) that have been paying large service fees or royalties to their offshore affiliates located in tax havens and low-tax jurisdictions are the focus of the investigation under Notice 146. The investigation will examine the years from 2004 to 2013, which is as far back as the 10-year statute of limitations allows tax authorities to recover tax funds in transfer pricing and anti-avoidance cases.

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