State Administration of Taxation, Circular on the Investigation of Tax Payment of Foreign-invested Enterprises and Foreign Enterprises Responsible for One Single Function of Production

Issued: March 7 2007

Main Contents: Foreign-invested enterprises and foreign enterprises established in China that, based on the overall business plan of the overseas parent company, engage in the processing and manufacturing of products according to product orders are responsible for only one function of production. The overseas parent company or other affiliated companies are responsible for the functions of decision-making, research and development of products and sales. According to the internationally-accepted principles of transfer pricing, enterprises responsible for only one single function of production generally maintain a certain level of profitability and do not incur any loss in principle. The Circular urges tax authorities in all regions to earnestly investigate such foreign-invested enterprises and foreign enterprises. With regard to loss-incurring or low-profit-making enterprises, authorities shall, in accordance with the State Administration of Taxation, Circular on Amending the«Rules on the Administration of Tax on Business Transactions Between Affiliated Enterprises» , select the appropriate comparable price or comparable enterprise on the basis of economic analysis to determine the profit of the enterprise.