Shenzhen Introduces Advance Tax Compliance Assessment for Cross-border Transactions


published on 22 January 2024 | reading time approx. 3 minutes

In order to further improve the tax certainty of multinational enterprises and reduce tax disputes, the Shenzhen tax authority issued the “Q&A on Advance Tax Compliance Assessment Services for Cross-Border Matters” on 28 December 2023. Effective from that day, Shenzhen tax authority provides assessment services regarding special tax adjustment risks on future cross-border transactions, and written assessment opinions in accordance with prevailing laws and regulations ("Compliance Assessment Service").

According to this new regulation, the Compliance Assessment Service is applicable to:
  • assessing the tax risk level of functions performed by enterprises and their related parties in cross-border transactions;
  • selection of transfer pricing methods;
  • recognition methods of related party and third party debt investments.

The new regulation clearly states that if a company has similar or identical cross-border transactions in previous years which involve ongoing or closed special tax adjustment and investigation (including risk management), the Compliance Assessment Service is not applicable. If an enterprise has advance pricing arrangement (“APA”) that is under negotiation or execution, the transactions involved are excluded from the scope of this service.

Enterprises that meet the conditions shall submit an application form to the relevant department of the Shenzhen tax authority, clarifying the type of application, overview of all relevant parties, detailed description, key assumptions, applicant claims, etc., and attach relevant materials. It is worth noting that the Shenzhen tax authority has also clearly listed the details that should be emphasized in the application form for different types of application.

In addition, the new regulation also specifies the timeline for the entire service process from acceptance, communication and evaluation to delivery of assessment opinions in written form (see figure below), which facilitates taxpayers to make better plans and reflects the efficiency of the service.

tax compliance assessment SZ_EN.JPG
The Compliance Assessment Service is applicable to cross-border transactions that occur within three years from the tax year in which the tax authority delivers the "Notice of Tax Matters" to the enterprise for accepting its application. In addition, upon application by the enterprise, the assessment opinion can be retrospectively applied to the same or similar cross-border matters that have occurred in previous years. Enterprises that have obtained assessment opinions will also have priority in their APA applications.

Our Observations

There are many similarities between the application for Compliance Assessment Service and APA. However, unlike the APA application which requires the applicant to have a related party transaction amount exceeding RMB 40 million in each of the three tax years preceding the application year and submit the contemporaneous TP Documentation for the above three years, the Compliance Assessment Service can be applied to businesses that have not yet been actually carried out and will be suitable for more enterprises. This provides multinational groups with the possibility of consulting in advance about the rationality of their pricing policies for new businesses.

The implementation of this new service will undoubtedly help multinational enterprises arrange related party transactions in China and evaluate tax risks and costs. It also demonstrates the determination of the State Taxation Administration to further optimize the tax environment. The written opinions issued by tax authorities for advance assessment or pre-ruling services not only provide tax certainty but may also serve as professional opinions from tax authorities in the future to increase feasibility and flexibility in other tax related matters.

Taxpayers that have intention of the Compliance Assessment Service should prepare complete and accurate relevant information in accordance with the regulation and explain key points in detail so that the tax authority can make more effective judgments. It should be noted that if the information submitted is incomplete, it will result in delay or termination of the service. Therefore, taxpayers can seek the help of professional tax advisors during the document preparation process.

The final opinions of the Compliance Assessment Service will include two types, namely the risk of special tax adjustment is low, or it was unable to form a conclusion. In case of the latter, it is recommended that companies actively seek communication with tax authorities and the opinions from professional tax advisors to identify potential high-risk factors in future cross-border arrangements as early as possible. We also suggest that companies evaluate the reasonableness of their current transfer pricing arrangement before applying for the Compliance Assessment Service in order to avoid exposing their transfer pricing issues to tax authorities during the assessment process.

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