China Implementation Measures of Special Tax Adjustment Consultation Draft

Unofficial Translation by Deloitte
For reference only
Implementation Measures of Special Tax Adjustment

(Draft for Public Consultation)

Chapter 1 General Provision
Article 1 - In order to standardize the administration of special tax adjustments, this regulation is drawn up in
accordance with the People's Republic of China ("PRC") Enterprise Income Tax Law (hereafter referred to as
"Tax Law" or "EIT Law") with its implementation rules (hereafter referred to as "EIT Implementation Rules"), PRC
Tax Collection and Administration Law (hereinafter referred to as "Tax Collection Law") with its implementation
rules (hereafter referred to as "Tax Collection Law Implementation Rules"), and relevant provisions of the tax
treaties (or arrangements) to avoid double taxation between the Chinese government and governments of other
countries (or regions) (hereinafter referred to as the "tax treaties").
Article 2 - This regulation is applicable to the administration of special tax adjustments by tax authorities for
transfer pricing, advance pricing arrangements ("APA"), cost sharing arrangements ("CSA"), controlled foreign
corporations ("CFC"), thin capitalization, and general anti-tax avoidance rules.
This regulation shall not be applicable to tax audit cases which involve tax offenses such as tax evasion, tax
fraud, refusal to pay tax and issuance of false tax invoices.
Article 3 - Transfer pricing tax administration refers to administrative work by the tax authorities, including
verification, evaluation, investigation and making adjustments on transactions between an enterprise and its
related parties (hereafter referred to as "related party transactions "), on whether the related party transactions
are carried out in accordance with the arm's length principle.
Article 4 - APA tax administration refers to administrative work by the tax authorities, including verification,
evaluation of pricing principles and calculation methods proposed by an enterprise for related party transactions
in future years, and the conclusion of an advance pricing arrangement after negotiations between the tax
authorities and the enterprise.
Article 5 - CSA tax administration refers to administrative work by the tax authorities, including verification,
evaluation, investigation and making adjustments on CSAs entered into between an enterprise and its related
parties, to ensure that the arrangement satisfies the arm's length principle.
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Article 6 - Administration of CFCs refers to administrative work by the tax authorities, including verification,
evaluation and investigation of the business reasonableness of non-distribution or reduced profit distribution by
CFCs, and making relevant adjustments to attribute the appropriate profits back to the Chinese tax resident
enterprise.
Article 7 - Administration of thin capitalization refers to administrative work by the tax authorities, including
verification, evaluation and investigation on the enterprise's debt from its related parties and equity investment to
ascertain whether the ratio is as stipulated or satisfies the arm's length principle, and to make related
adjustments.
Article 8 - Administration of general anti-tax avoidance rules refers to the administrative work by the tax
authorities, including verification, evaluation, investigation on an enterprise to ascertain whether it has entered
into transactions without any commercial purposes other than reducing its taxable revenue or income, and
making related adjustments.

Chapter 2 Reporting and Filing of Related Party Transactions
Article 9 - The term "related parties" as used in Article 109 of the EIT Law Implementation Rules and Article 51 of
the Tax Collection Law Implementation Rules refers to one of the following relationships between one party and
another party (i.e. enterprise, organization or individual):
25%
25%
(1) One party directly or indirectly holds 25% or more in aggregate of the shares of the other party; or a third party
directly or indirectly holds 25% or more in aggregate of the shares of both parties;
25%
Where one party holds the shares of the other party through an intermediary, so long as that party holds 25% or
more of the shares of the intermediary, the percentage by which that party holds the shares of the other party is
the same as that of the intermediary's shareholding of the other party.
Where two or more individuals are related by marriage, lineal descent, within three degrees of blood relationship
and other relations, and jointly hold shares of the same enterprise, their shareholding percentage should be
combined in determining the aggregate shareholding percentage.
50% 10%
(2) Where one party's shareholding percentage in the other party, or a third party's shareholding percentage in
both parties, does not reach the shareholding percentage threshold as specified in (1), the total debts owed by
one party to the other party (with the exception of an independent financial institution) exceed 50% of either
party's paid-in capital, or 10% or more of the total debts owed by one party is guaranteed by the other party (with
the exception of an independent financial institution).
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=/
% of total debts to paid-in capital = Annual weighted average amount of debts / Annual weighted average paid-in
capital, of which:
= i i /365
Annual weighted average amount of debts = Book value of debt (i) Actual borrowing days of debt (i) in a year /
365
= i i /365
Annual weighted average paid-in capital = Book value of paid-in capital (i) Actual investment days of paid-in
capital (i) / 365
both parties, does not reach the shareholding percentage threshold as specified in (1), one party's normal
running of its production and operational activities are dependent on intangibles provided by the other party
(including industrial property rights, trademark, patent, non-patented technology, etc.)
both parties, does not reach the shareholding percentage threshold as specified in (1), the purchase and sales
activities, provision or receipt of services, and other business activities of one party are substantially controlled by
the other party.
Substantial control refers to the right of one party to make decisions on the operational strategies, transaction
terms, pricing, etc.
(5) More than half of one party's senior management personnel (including the chairman, directors, company
secretary, general manager, chief accountant, chief financial controller, deputy general managers and personnel
exercising similar powers), or at least one senior member of the board of directors who is able to exert control
over the board, is appointed by the other party, or concurrently hold senior management position of the other
party or are able to exert control over the board of directors; two parties with more than half of their senior
management personnel, or at least one senior member of the board of directors who is able to exert control over
the board of directors, is appointed by the same third party.
(6) Where two individuals are related by marriage, lineal descent, within three degrees of blood relationship or
other relations, the relationship between one party and one of the two individuals satisfies one of the definitions
specified in (1) to (5) hereof, so does the relationship between the other party and the other individual.
(7) Both parties are related by means of other interests.
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Article 10 - Any shareholding by the State or association through delegation of senior personnel by the State
Asset Management Departments to a party, and therefore satisfying a relationship specified within (1) to (5) of
Article 9, will not be deemed to constitute a related party relationship.
Article 11 - Related party transactions include the following categories:
(1) The transfer of the ownership of or right to use tangible assets, including products, commodities, real estate,
vehicles, machinery and equipment, and other tangible assets;
(2) The transfer of financial assets, including accounts receivables, notes receivables, loans, other receivables,
equity investment, debt investment, derivative instruments, and other financial assets;
(3) The transfer of the right to use or the ownership of intangible assets, including patents, non-patented
technology, trademarks, copyrights, franchise, land-use rights, goodwill, value of going concern, etc.;
(4) Financial transactions, including all kinds of long-term and short-term borrowing, lending and guarantees, and
all kinds of interest bearing advance payments and deferred payments, group cash pooling, etc.;
(5) Provision of services, including market survey, marketing, agency, design, consultancy, administration,
technical services, contract research & development, maintenance, legal, financial management, audit,
recruitment, staff training, centralized procurement, and other services;
(6) Equity transfer; and
(7) Other types of related party transactions.
,
When filing annual tax returns, resident enterprises which are taxed on an actual profit basis and nonresident
enterprises with establishments in China which are taxed on an actual profit basis should prepare and submit the
"PRC Annual Related Party Transactions Reporting Form".
Enterprises which satisfy any of the following circumstances are required to complete the country-by-country
reporting form when filing the "PRC Annual Related Party Transactions Reporting Form".
50
(1) The enterprise is the ultimate holding company of a multinational group, and the annual consolidated revenue
of the group of the last fiscal year exceeds CNY5,000,000,000.
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(2) The ultimate holding company of the enterprise is outside China, but the enterprise has been designated by
the multinational group to prepare and submit the country-by-country report.
Article 13 - Enterprises that have difficulties in submitting the "PRC Annual Related Party Transactions
Reporting Form" may apply for an extension of time, in accordance with relevant provisions of the Tax Collection
Law and its Implementation Rules.

Chapter 3 Contemporaneous Documentation
Article 14 - Contemporaneous documentation includes a master file, a local file and a special issue file.
Article 15 - The master file is mainly intended to provide an overview of the multinational's global business,
which will include the following:

(1) Organizational structure
1.
a. Chart illustrating the group's global shareholding structure and geographic location of all member entities. A
member entity refers to any business entity in the group including a corporation, partnership, permanent
establishment, etc.

(2) Business description
1.
a. A description of the group's business, including key value drivers creating profits;
2. 5%
b. A description of the supply chain and major market conditions in relation to the group's five largest products
and/or service offerings by turnover, plus any other products and/or services amounting to more than 5 percent of
group turnover;
3.
c. A description of important intragroup service arrangements, other than research and development (R&D)
services, including a description of the capabilities of the entities providing the services, and pricing policies for
intra-group services;
4.
d. A description of the value creating contributions from each group entity, including details of the functions
performed, significant risks assumed, and important assets employed;
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5.
e. A description of business restructuring, transfers of functions, risks or assets within the group during the fiscal
year; and
6.
f. A description of reorganizations during the fiscal year, including changes in legal forms, debt restructuring,
equity acquisition, asset acquisition, mergers, divisions, etc.

(3) Intangibles
1.
a. A description of the group's overall strategy for the development, ownership and exploitation of intangibles;
2.
b. A description of R&D facilities and R&D management, including location, main functions and personnel of
principal R&D facilities;
3.
c. A list of intangibles of the group which have a significant impact on the group's transfer pricing policy, and the
legal ownership of such intangibles;
4.
d. A list of inter-company agreements related to intangibles, including CSA, R&D service agreements, and
license agreements;
5.
e. A description of the group's transfer pricing policies related to R&D and intangibles; and
6.
f. A description of any transfers of interests in intangibles among related parties during the fiscal year, including
the related enterprises, countries, and consideration.

(4) Finance arrangement
1.
a. A description of group's financing position and key financing arrangements with unrelated lenders;
2.
b. A description of the group entities that provide central financing for the group, including the country of
incorporation, and country of effective management; and
3.
c. A description of the group's transfer pricing policies related to financing arrangements between related parties.

(5) Financial and tax status
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1.
a. The group's annual consolidated financial statement for latest fiscal year;
2.
b. A list of the groups existing unilateral APAs and other tax rulings relating to the allocation of income among
countries; and
3.
c. A list of the names and locations of member entities of the group that will prepare and submit the country-bycountry report.
Article 16 - The local file should mainly disclose more detailed information for the specific intercompany
transactions of the local enterprise, including the following:

(1) Overview of local enterprise
1.
a. Organizational structure, including the functional departments, scope of responsibilities and number of
employees;
2.
b. Management structure, including a description of the party(ies) to whom local management reports to and the
country(ies) in which such party(ies) maintain their principal offices;
3.
c. Industry description, including an overview of the industry in which the enterprise operates and its development
level, industrial policies, trade restrictions, other major economic and legal issues that may impact the industry,
key competitors;
4.
d. Operating Model, including business strategy and key value drivers;
5.
e. Business description, including the business activities of each department in each working flow;
6.
f. Segmented financials for each type of business and products, including details of income, costs, expenses and
profit; and
7.
g. A description of reorganizations or transfers of intangibles in which the local enterprise is involved, and how
the change affects the local enterprise.

(2) Related party relationships
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1.
a. Information on related parties, including any related party which directly or indirectly hold shares of the local
enterprise, and with which the local enterprise enters into transactions (i.e. name, legal representative, relevant
information of senior officers, registered address, actual business address) as well as any related party
individual's name, nationality, domicile and other information;
2.
b. Tax rate applicable for each related party, with details on names of the taxes with income tax nature, tax rates
and any preferential tax treatments; and
3.
c. Changes in related party relationships during the fiscal year.

(3) Related party transactions
1.
a. Overview of related party transactions
1
(i) Description and details of related party transactions, including copies of contracts / agreements entered into
between the local enterprise and its related parties, explanation of contract execution status, details on the
related party transactions (including background, nature, parties involved, timing, transaction value, settlement
currency, contractual terms, trading model, etc.); and how these differ from transactions with unrelated parties;
2
(ii) Business processes for related party transactions, including the flow of information, goods, and funds, and
how these differ from transactions with unrelated parties;
3
(iii) Description of functions and risks, including the functions performed, risks assumed and assets employed by
the enterprise and its related party for each category of related party transactions, and any changes compared to
prior years;
4
(iv) Factors affecting the pricing of related party transactions, including intangible assets involved in related party
transactions and their impact on pricing; and the main economic and legal factors which may impact on the
pricing of related party transactions; and
5
(v) Financial information for the related party transactions, including the value of intra-group payments and
receipts for each category of related party transactions involving the local enterprise, with details of the receipts
from / payments to related parties in each tax jurisdiction; information on the allocation of income, costs and
expenses, and profits between related and unrelated party transactions, and explanation of allocation key(s)
being used.
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2.
b. Analysis on value chain
1
(i)Transaction flow, physical flow of goods and cash flow within the group, including design, development,
manufacture, marketing, delivery, payment, consumption, aftersales services, final cyclic utilization and other
process of products, service or other trading object and all involving parties;
2
(ii) Annual financial statements (both consolidated and company level) for the latest fiscal year of each of the
group entities involved in the value chain; and
3
(iii) Allocation principles and actual allocation results of group profits amongst the global value chain.
3.
c. Outbound investment
1
(i) Information on outbound investment, including the location, investment value, main business and strategic
plan;
2
(ii) Overview of outbound investment projects, including shareholding structure of outbound investment projects,
organizational structure, details on employment of senior personnel, entity with final decision making authority,
etc.; and
3
(iii) Project data of the outbound investment project, including operational information.
4.
d. Related party equity transfer
1
(i) Overview of related party equity transfer, including due diligence report, background, parties involved, timing,
pricing method, payment method and other factors affecting the equity transfer;
2
(ii) Information on the equity transferred, including the geographic location of the target, date of the acquisition,
acquisition method, cost, gains from the transfer, and other information; and
3
(iii) Underlying asset valuation report for the transferred equity.
5.
e. Related party services
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1
(i) Overview of related party services, including descriptions of the services provided, the service provider(s) and
recipient(s), pricing method, form of payment, transaction value, and other information;
2
(ii) Calculation of service costs and methodology for determining relevant costs; and
3
(iii) Where the related party services involve several service recipients, or where the service cost and expenses
cannot be objectively identified to determine the cost base, the enterprise should consider various allocation keys
to allocate the costs between service recipients / service projects, e.g. income, operating assets, number of
employees, employee salaries, utilization of equipment, data traffic, working hours or another reasonable
allocation key.
6.
f. Unilateral and bilateral/multilateral APAs and other competent authorities' tax rulings which are not relevant to
the tax jurisdiction in which the concerned enterprise is located, but are relevant to the concerned related party
transactions.

(4) Comparability analysis
1.
a. Factors considered in performing the comparability analysis, including the characteristics of the transacted
goods or services, functions performed and risks assumed by the relevant parties, contractual terms, economic
environment, business strategies, etc.;
2.
b. Information related to the functions performed, risks assumed and assets employed by the comparable
enterprises;
3.
c. Description of the comparable transactions, such as: the physical characteristics, quality and efficacy of
tangible goods; normal interest rates, amount of financing, currency, duration, guarantees, credit ratings, terms of
repayment, methods of interest computation for financing activities; the nature and the extent of services; the
types and transaction forms of intangible assets, the right to use such intangible assets, and the benefits from the
intangible;
4.
d. The source, selection criteria and rationale for the comparable information; and
5.
e. Adjustments and rationale for the adjustments made to the comparable data.

(5). Selection of transfer pricing methods
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1.
a. The selection of transfer pricing method, and the rationale for the selection; irrespective of the selected
method, the enterprise must explain its contribution to the groups overall profit or residual profit;
2.
b. How the comparable data can support the selected transfer pricing method;
3.
c. Application of the reasonable transfer pricing methods and results of the comparability analysis to determine
the arm's length prices or profits, as well as any assumptions and judgments made in the process; and
4.
d. Other information to justify the selection of the transfer pricing method.
Article 17 - The Special Issue file should include details on any special issues for related party service
transactions, CSAs and thin capitalization. Details of the requirements are provided in Chapter 7, Chapter 9 and
Chapter 11 of this regulation.
Article 18 - Enterprises which meet one of the following criteria are required to prepare the master file and local
file:
2
(1) The annual sum of related party purchases/sales is greater than RMB 200 million (for toll manufacturing
activities, the amount is calculated based on the import/export customs declaration prices)
4000
(2) The annual sum of other related party transactions is greater than RMB 40 million (for related party financing,
the amount is calculated based on the interest received/paid)
(3) A limited function and risk entity which has a loss.
Article 19 - Enterprises which meet one of the following criteria are required to prepare the special issue file:
(1) Has a related party service transaction.
(2) Has a CSA in place.
(3) Breaches the thin capitalization regulations.
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Enterprises should prepare the contemporaneous special issue file in accordance with Chapter 7, Chapter 9 and
Chapter 11 of this regulation.
Article 20 - Enterprises are exempt from preparing contemporaneous documentation if they meet one of the
following criteria:
(1) Where related party transactions are covered under a concluded APA; or
(2) The enterprise only enters into related party transactions with other related parties in Mainland China.
5 31
20
Article 21 - Enterprises should complete the preparation of contemporaneous documents for a year before May
31 of the following year, and submit the documents within 20 days of receiving a request from the tax authorities.
20
Article 22 - Enterprises that are unable to submit the documents due to force majeure should submit the
documents within 20 days after the force majeure is over.
.

Article 23 - The contemporaneous documentation should be prepared in Chinese. If the original document is
prepared in a foreign language, the enterprise should submit a Chinese translation.
Article 24 - An enterprise that provides false or incomplete information which does not truly reflect the company's
related party transactions, would be considered to have failed to satisfy the contemporaneous documentation
requirements.

Article 25 - The contemporaneous documentation should be submitted to the tax authority with the company's
legal seal and signature of the legal representative or the delegate empowered by the legal representative. The
source of cited information in the documents should be provided.
Article 26 - If the enterprise changes or cancels its tax registration due to a merger or division, the relevant
contemporaneous documents should be maintained by the surviving enterprise after the merger or division.
Article 27 - Contemporaneous documents should be retained by the enterprise in accordance with the Tax
Collection Law Implementation Rules.

Chapter 4 Transfer Pricing Methods
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Article 28 An enterprise entering into related party transactions, and tax authorities in reviewing and evaluating
related party transactions, should follow the arm's length principle to determine a reasonable transfer pricing
method.
The transfer pricing methods include the comparable uncontrolled price method, the resale price method, the
cost plus method, the transactional net margin method, the profit split method, and other methods.
In applying a reasonable transfer pricing method, factors to determine the transfer price, or the profit of each
relevant party should include the functions performed, assets employed, risks borne and value creation of all
relevant parties to the transactions.

Article 29 A comparability analysis should be conducted when selecting a reasonable transfer pricing method,
with consideration of the following five aspects:
(1) Characteristics of the transacted assets or services, including: the physical characteristics, quality, and
quantity of tangible assets; the types, the transaction forms, protection, term and scope, as well as the expected
returns of intangible assets; the nature and scope of the services; the characteristics, scope, and risk
management of financial assets; and the nature and scope of the equity investment;
(2) Functions performed, assets employed and risks assumed by the parties to the transactions. Functions
include: research and development, design, purchasing, processing, assembling, manufacturing, repairs and
maintenance, distribution, sales and marketing, advertising, inventory management, logistics, warehousing,
financing, general administration, accounting, legal and human resource management, etc. When comparing
functions, close attention should be paid to the types and characteristics of assets employed by the enterprises to
perform such functions. Assets include tangible assets, intangible assets, financial assets, equity and other
assets. Risks include investment risks, research and development risks, procurement risks, production risks,
market risks, management and financial risks, etc.;
(3) Contractual terms, including the object of the transaction, the quantity and prices of the transactions, the
forms and terms of payment; the terms of delivery; the scope and terms of after-sale services; conditions for the
provision of additional services; the rights related to modifying and amending the terms of the contract; duration
of the contract; and the right to terminate or renew the contract; as well as the ability and behavior to deliver the
obligations under the contract;
(4) Economic circumstances, including: industry overview, geographic region, market scale, market level, market
share, degree of market competition, consumer purchasing power, substitutability of the goods and services,
prices of the production factors, transportation costs, governmental regulations, location specific factors, and
other factors.
(5) Business strategies related to innovation and development, business diversification, operational synergies,
risk aversion, and market penetration.
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Article 30 The comparable uncontrolled price method should be based on the prices of the same or similar
transactions between unrelated parties as the arm's length price for the related party transactions.
The comparability analysis should examine differences in the characteristics of the transacted properties and
services between related and unrelated party transactions, in the areas of contractual terms, operational
strategies and economic environment, based on the nature of the transactions as follows:
(1) Transfer of the legal ownership of or right to use tangible assets

1.
a. The process of transfer, including the time and location of the transaction; terms of delivery; conditions of
delivery; terms of payment; quantity involved; timing and location of after-sale services, etc.;
2.
b. Stages involved in the transfer, including manufacturing, wholesale, retail, export, etc.;
3.
c. The economic environment for the transfer, including local customs and practice, consumer preference,
political stability, as well as the fiscal, taxation and foreign exchange policies, etc.
4.
d. The functionality, specifications, models, configuration, types, and method of depreciation of the tangible
assets.
5.
e. The timing, duration and location of the right to use.
6.
f. The owner's investment expenditure and maintenance costs for these assets, etc.
(2) Transfer of financial assets, including the actual terms, liquidity, security and rate of return of the financial
assets.
(3) Transfer of the right to use or legal ownership of intangible assets.

1.
a. The types, usage, applicable industries, and expected returns of the intangible assets.
2.
b. The development costs, conditions for the transfer, exclusivity, the degree and duration of the protection by
relevant laws and regulations, geographic location, useful life, stage of research and development, right to
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maintain and update, the cost and expenses of the transfer, the functions and risks of the intangible assets,
whether any substitutes are available, etc.
4. Financing transactions, including the financed amount, currency, duration, guarantee, credit rating of borrower,
terms of repayment, methods of interest calculation, etc.
5. Provision of services, including the nature of the service, technical requirements, professional proficiencies,
responsibilities assumed, forms and terms of payment, direct and indirect costs, etc.
6. Equity transfer, including the nature of the company, business and asset structure, industry in which the
company operates, industry cycle, operational model, company size, asset allocation and utilization, growth of
the company, operational risks, financial risks, time of transactions, geographic location, equity relationships,
historical and future operations of the company, goodwill, tax position, liquidity, economic trends, macroeconomic
policy, revenue cost structure of the company and other factors.
Where there are significant differences in the abovementioned factors between related party transactions and
unrelated party transactions, a reasonable adjustment on the price of the transactions should be made to account
for such differences. If it is not possible to make such adjustments, other transfer pricing methods in this Chapter
should be considered.
The comparable uncontrolled price method is applicable for all types of related party transactions.

Article 31 The resale price method involves determining the arm's length price for goods purchased from a
related party by deducting the gross profit of a comparable uncontrolled transaction, from the resale price to
unrelated parties. The formula is as follows
=1-
=/100%
Arm's length purchase price = Resale price to unrelated parties 1 Gross margin of a comparable
uncontrolled transaction
Gross margin of a comparable unrelated party transaction = Gross profit of a comparable uncontrolled
transaction/ Net sales of a comparable uncontrolled transaction x 100%
When conducting a comparability analysis, special attention should be paid to investigating the differences
between the related party transactions and unrelated party transactions in terms of the functions performed,
assets employed and risks assumed; contractual terms and conditions; and other factors which may impact the
gross margin, such as advertising, marketing, distribution, warranty, as well as relevant services and inventory
risk; value and useful life of machinery and equipment; use of intangible assets and their value; valuable
marketing intangibles, retail or sales channel, business experience, accounting treatment, management
efficiency, etc.
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unrelated party transactions, a reasonable adjustment on the gross margin of the transactions should be made to
account for such differences. If it is not possible to make such adjustments, the other transfer pricing methods in
this Chapter should be considered.
The resale price method is usually applicable to situations where resellers do not materially change the shape,
performance, structure, trademark etc. of the products, but only conduct simple processing activities or pure
distribution activities.

Article 32 The cost plus method establishes the arm's length price for related party transactions as the
reasonable costs incurred under a related party transaction, plus an appropriate mark-up derived from a
comparable uncontrolled transaction. The formula is as follows
=1+
=/100%
Arm's length price = Reasonable costs incurred under a related party transaction 1 + Cost plus margin of the
comparable uncontrolled transaction
Cost plus margin of comparable uncontrolled transaction = Gross profit of comparable uncontrolled transaction /
Gross costs of the comparable uncontrolled transaction x 100%
between the related party transactions and unrelated party transactions in terms of the functions performed and
risks assumed; contractual terms and conditions; and other factors which may impact the cost plus margin, such
as manufacturing, processing, installation and testing functions; market and foreign exchange risk; value and
useful life of machinery and equipment; use of intangible assets and their value; business experience, accounting
treatment, manufacturing and management efficiency, etc.
unrelated party transactions, a reasonable adjustment on the cost plus margin of the transactions should be
made to account for such differences. If it is not possible to make such adjustments, the other transfer pricing
methods in this Chapter should be considered.
The cost plus method is usually applied for the transfer of the legal ownership of or right to use tangible assets,
provision and receipt of services, and financing transactions between related parties.

Article 33 The transactional net margin method uses profit level indicators of comparable uncontrolled
transactions to determine the net operating margin of the related party transactions. The profit level indicators
include return on assets ("ROA"), operating margin, EBIT operating margin, net cost plus margin, Berry Ratio,
etc. The formulae of various profit level indicators are:
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=/100%
(1) Return on assets = net profit / total assets 100%
=/100%
(2) Operating margin = operating profit / operating income 100%
=/100%
(3) EBIT operating margin = net profit (before interest and tax) / operating income 100%
=/100%
(4) Net cost plus margin = net profit (before interest and tax) / total costs 100%
=/+100%
(5) Berry Ratio = gross profit / (operating expenses + general administration expenses) 100%
between the related party transactions and unrelated party transactions in terms of the functional and risk profile;
economic environment; and other factors which may impact the operating profit, including functions performed,
risks assumed, assets employed; industry and market environment; business scale; economic cycle; product life
cycle; the allocation of costs, expenses, income and assets between transactions; accounting treatment,
operating and management efficiency, etc.
The selection of a profit level indicator should be consistent with the comparable analysis, reflecting the functions
performed, risks assumed and assets employed by the parties to the related party transaction. Where
necessary, appropriate adjustments may be made to certain financial data.
unrelated party transactions, a reasonable adjustment on the profit of the transactions should be made to account
for such differences. If it is not possible to make such adjustments, the other transfer pricing methods in this
Chapter should be considered.
The transactional net margin method is usually applied for the transfer of tangible assets, transfer of intangible
assets, as well as the provision and receipt of services between related parties, where the transferor or service
provider is an enterprise without significant intangible assets.

Article 34 The profit split method refers to the methodology where the aggregate profits (including both actual
profits and projected profits) are split amongst all relevant related parties according to the contribution from each
respective enterprise. There are two types of profit split method: (1) general profit split method; and (2) residual
profit split method.
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The general profit split method splits profit amongst related parties according to the functions performed, risks
assumed and assets employed by each relevant entity, applying the arm's length principle to determine the
appropriate profits for each related party.
The residual profit split method first identifies the routine profit for each related party, and then subtracts the
routine profits from the total aggregate profits, thus deriving the residual profit. Next, the residual profit will be
split amongst the related parties in accordance with the contribution from each enterprise.
When conducting a comparability analysis, special attention should be paid to the functions performed, risks
assumed, assets employed by each related party; costs, expenses, income and assets allocated amongst each
related party; location specific factors, accounting treatment, reliability of the information and assumptions used in
evaluating the contribution to the residual profit made by each related party.
The profit split method is usually applied for those transactions where the related parties make unique value
contributions, or where the related party transactions are highly integrated and it is difficult to evaluate the
operating results in isolation.

Article 35 Other methods include the value-contribution allocation method, the asset valuation method, and
others.
(1) The value-contribution allocation method is applied by analyzing the value creation factors and their
contribution to the profits of a multinational group, to allocate a consolidated profit to each of the related parties
located in various countries. A factor which is relevant to the value contribution, or a combination of such factors,
needs to be considered in allocating the profit. Such factors include the assets, costs, expenses, sales income,
number of employees, etc.
The value-contribution allocation method is usually applied for those transactions that lack comparable
information but that can reasonably determine the multinational group's consolidated profit, as well as the
contribution of each value creation factor.

(2) The asset valuation method, including the cost approach; the market approach; and the income approach.
Under the cost approach, the value of an asset is determined as the cost to replace the asset, based on the costs
of creating a similar asset under the current market conditions. The cost approach is applicable in situations
where the asset in question is replaceable.
Under the market approach, the value of an asset is determined, either with a direct comparison or through a
comparison analysis, based on the most recent transaction price of an asset of the same or similar nature in the
market. The market approach is applicable where comparable market data for the same or similar asset is
available.
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Under the income approach, the value of an asset is determined based on the present value of the expected
return from the asset. The income approach applies to the valuation of an enterprise's aggregate assets, as well
as individual assets with future returns that can be reasonably forecasted. In applying the income approach to
evaluate intangible assets, the economic life of the intangible assets should be reasonably determined.

Chapter 5 Special Tax Audit and Adjustment

Article 36 - Tax authorities shall, in the normal course of their day-to-day tax collection and administrative duties,
carry out related party transaction risk analysis and screen special tax investigation cases, to identify target
enterprises for tax audits. In analysing the related party transaction risks through a comprehensive evaluation
and analysis of the production and operating conditions of the enterprise and its related party transactions, the
tax authorities should mainly refer to historical annual income tax filings, PRC Annual Related Party Transactions
Reporting Forms, and other tax related documents previously submitted by the enterprise.

Article 37 - In identifying enterprises to be investigated, tax authorities shall focus on enterprises with the
following risk characteristics.
``
(1) Enterprises with high value related party transactions or with multiple types of related party transactions;
(2) Enterprises with long-term losses, marginal profit or fluctuating profit;
(3) Enterprises with a profit level below the industry level;
4. Enterprises with profit levels that do not match their functions performed and risks assumed, or the benefits
received do not match with the costs shared;
5. Enterprises that enter into transactions with any related parties located in a low-tax jurisdiction;
6. Enterprises that fail to report their related party transactions or fail to prepare contemporaneous documentation
in accordance with relevant regulations;
7. Enterprises with a related party debt to equity ratio which exceeds the threshold as stipulated in the relevant
regulations;
8. Enterprises that set up controlled foreign corporations in a low tax jurisdiction;
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9. Enterprises that conduct a business arrangement without a reasonable commercial purpose;
10. Enterprises that do not satisfy the arm's length principle.

Article 38 - In conducting a tax audit, the tax authorities shall designate two or more officers to jointly conduct the
investigation, and the officers shall produce a "Tax Inspection Certificate" and serve to the enterprise a "Notice of
Tax Audit" when conducting the audit.
In cases where the audited enterprise is located overseas, the tax authorities may either serve the "Notice of Tax
Audit" to the audited enterprise directly, or request that the domestic related party of the audited enterprise
forwards the "Notice of Tax Audit".

Article 39 - The tax authorities shall, in conducting special tax audits, have the authority to request the audited
enterprise, its related parties and any other enterprise related to the audit, to provide relevant information.
(1) When requesting that the audited enterprise and its related parties provide relevant information, the tax
authorities should serve upon them a "Notice of Taxation Matters".
In cases where the audited enterprise or its related parties are located overseas, the tax authorities may either
serve the "Notice of Taxation Matters" to the relevant enterprises directly, or request that the domestic related
entity forward the "Notice of Taxation Matters".
(2) When requesting information from other enterprises under the same tax jurisdiction of the in charge tax
bureau, the tax authorities shall issue a "Notice of Taxation Matters". If an on-site investigation is needed, a
"Notice of Tax Audit" should be served.
(3) When requesting information from other enterprises in different tax jurisdictions, the tax authorities should
issue letters for assistance to the tax bureau in charge of that jurisdiction, which will serve the "Notice of Taxation
Matters" to the relevant enterprise. If on-site investigation is needed, a "Notice of Tax Audit" should be served.
Article 40 - The audited enterprise, its related parties and any other enterprises involved in the audit must
provide the true and complete information requested by the tax authorities. They may not refuse to provide or
conceal the information.
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(1) Provide the original version of documents maintained by the enterprise itself, including the original records,
duplicate copies, etc. If the enterprise has difficulty in providing original version, it may arrange for certified true
copies, photos, excerpts, etc. but they must be certified by the entity that maintains the original documents,
signed and/or affixed with the official seal by the provider.
(2) When providing photocopies of the original documents preserved by the other relevant parties, the source
should be specified and the entity that maintains the original documents must certify the copies, with signature
and/or the official seal of the provider.
(3) When providing documents or audio/visual materials in a foreign language, a Chinese translation should be
attached. The provider should be responsible for the authenticity and completeness of the translation.
(4) Overseas information should have the source specified. In case the tax authorities have doubts on the
authenticity and completeness of the information, they have the right to request the information provider to further
provide a certification issued by a foreign notary, an accounting firm or a qualifying tax agency. A list of qualifying
tax agencies is publicly available on the website of the State Administration of Taxation.

Article 41 In cases which involve collecting electronic data, the tax authorities may undertake the following
actions:
(1) Request the information provider to print out electronic data as hard copies with a clear indication of the data
source, place of printing, and a remark that it is "a certified true copy", and to sign and/or affix a seal on the hard
copies.
(2) Store the electronic data in physical devices; copying and sealing up electronic data into read-only storage
media by inspectors together with the personnel designated by the party providing the electronic data, and sealed
in a package with details of the name of electronic data, creation method, creation time, creator, file format and
size, as well as a remark that it is "verified with electronic data recorded in the original storage media", and to
sign and/or affix a seal.

Article 42 - In conducting a special tax audit, the tax authorities may carry out procedures as authorized by the
laws, such as on-site inspection, review of accounting books and records, conducting enquiries, investigating
bank records / accounts, issuing letters for assistance, initiating the information exchange procedure with
competent tax authorities overseas, conducting investigations in other provinces/cities, etc.
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For audited enterprises using the electronic information system for management and accounting purposes, the
tax authorities have the right to request for tax-related information in accordance with the relevant provisions of
the Tax Collection Law and its Implementation Rules.

Article 43 - In conducting a special tax audit, the tax authorities may, according to the legal procedures provided
by the relevant laws and regulations, investigate and collect evidences which may be used to substantiate the
facts. They may take notes, record audio or video, take photographs, or photocopy the documents or materials
related to the case.
.
In gathering information and making records, the contents should be signed by two or more tax officers, and
checked and confirmed by the audited enterprise, which should sign and/or affix a seal on the relevant records.
The tax authorities should also inform relevant personnel prior to an audio or video recording, or taking
photographs.

3
Article 44 - When the tax authorities wish to obtain the previous years accounting records, books, financial
reports, etc., they are required to obtain approval from the director of the tax bureau (sub-bureau) at or above the
county level, issue a "Notice on Obtaining the Accounting Book" to the audited enterprise, complete a "List of
Obtained Accounting Books" for the audited enterprise to verify and confirm, and which is verified with the
audited enterprise's signature and/or official seal. The tax authorities should return the accounting books and
relevant documents completely within 3 months.

Article 45 - The enquiry should be conducted by two or more tax officers, one of whom will be designated to
prepare a "Written Record of Inquiries (Investigations)". The "Written Record of Inquiries (Investigations)" will be
provided to the personnel being enquired for checking and confirmation, and after verification, the personnel
being enquired should sign and/or affix a seal. If the personnel refuses to confirm and sign/affix a seal, two or
more tax officers may sign the "Written Record of Inquiries (Investigations)" and indicate the reason for the
personnel's refusal to confirm.

Article 46 - Where it is necessary to call on any party or witness to testify, they should be informed of their legal
obligation. The party or witness may provide testimony in writing or orally. For oral testimony, the tax officers
may take records and have the party or witness sign off on each page.
The testimony should include all basic information, including the name, age, gender, occupation, address, issue
date of the testimony, a copy of the identification of the witness, etc.
If any such party or witness wishes to change the testimony, inspectors shall take record of the revised parts,
specify the reasons of the change, and provide the same to the witness for confirmation and certification. The
original testimony will not be returned.
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Article 47 - Where the ultimate holding company of an audited enterprise is located overseas, if the ultimate
holding company is required to prepare a country-by-country report according to its applicable local laws and
regulations and the audited enterprise is within the scope of the country-by-country report, the tax authorities
shall have the right to require the audited enterprise to provide the country-by-country report, if the audited
enterprise satisfies one of the following conditions:
(1)The ultimate holding company of the multinational group did not submit the country-by-country report to the
competent tax authority, and the group did not assign any other enterprises to provide the report on behalf of the
ultimate holding company.
(2) The multinational group has submitted the country-by-country report, but the country that received the report
has not entered into any tax treaty, agreement or arrangement (with clause concerning automatic exchange of
country-by-country report information) with the PRC.
(3) The multinational group has submitted the country-by-country report and the country that received the report
has signed a tax treaty, agreement or arrangement (with clause concerning automatic exchange of country-bycountry report information) with the PRC, but the PRC fails to receive the country-by-country report.

Article 48 - Based on information collected from the PRC Annual Related Party Transactions Reporting Form
and other relevant information provided by the audited enterprise, the tax authorities will fill in the "Related Party
Relationship Confirmation Form", the "Related Party Transaction Confirmation Form", which will be verified and
confirmed by the audited enterprise. If the audited enterprise refuses to confirm the forms, two or more tax
officers may sign off and indicate the reasons of refusal by the audited enterprise.

Article 49 - If the audited enterprise refuses to provide the requested information concerning the special tax
audit, or provide false or incomplete information, the tax authorities have the right to make appropriate
adjustments based on the information obtained and any reasonable assumptions.
Article 50 - This regulation does not apply to transactions carried out amongst domestic related parties.

Article 51 - When investigating the inter-company contracts between an audited enterprise and its related
parties, if the tax authorities are of the view that the arrangement would not have occurred between independent
third parties, they may deny or recharacterize the related party transactions.
If the functions performed or risks assumed by the audited enterprise are greater than what an independent
enterprise would be willing to undertake, the enterprise should be properly compensated by its related parties.
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Article 52 - The tax authorities should analyze and evaluate whether an enterprise's related party transactions
comply with the arm's length principle by selecting and applying the transfer pricing methods prescribed in
Chapter 4 of this regulation. The tax authorities may use either information from public or non-public sources for
the analysis and evaluation.

Article 53 - When the tax authorities analyze and evaluate related party transactions of an audited enterprise, the
quality of the comparable enterprises should be considered with priority in selecting and screening comparable
enterprises. In circumstances where the level of comparability is very strong, it may be acceptable to use only
one comparable enterprise.
The tax authorities may use various statistical methods (such as the simple average, weighted average or the
quartile method) to calculate the mean value or the median of the selected comparable enterprises, on a year-byyear basis or multiple-year average basis, as a comparable profit level or comparable price.
Based on actual circumstances, the tax authorities may make year-on-year adjustments or consolidated
adjustments over multiple years to the related party transactions of the audited enterprise pursuant to the
comparable profit level or comparable price.

Article 54 - In analysing and evaluating the audited enterprise's profitability by using the quartile method, if the
profit level of the enterprise is lower than the median of the range of profitability established by comparable
enterprises, the audited enterprise's profit should be adjusted up to a level not lower than the median of the range
established by the comparable enterprises.

Article 55 - In analysing and evaluating related party transactions of an audited enterprise, except as otherwise
provided in Article 56, the tax authorities shall not apply any adjustments in relation to differences in working
capital between the audited enterprise and the comparable enterprises.

10%
Article 56 - In analysing and evaluating an audited enterprise which provides toll manufacturing services to its
related parties, the tax authorities shall restore the value of materials and equipment which were provided without
charges. If an enterprise is able to provide the actual and comprehensive data on the complete value chain with
details on the respective profit level of each of the related parties, the tax authorities may apply an adjustment in
relation to the difference in working capital between the audited enterprise and the comparable enterprises, but
within 10%.

Article 57 - In investigating and evaluating the related party transactions, the tax authorities shall consider the
location specific factors such as location savings, market premium, etc., and use a reasonable method to
determine the additional profit attributable to the audited enterprise as a result of such special factors.
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Article 58 - Enterprises engaged in routine manufacturing activities such as toll processing or contract
manufacturing, simple distribution or contract R&D activities for its overseas related parties, should not bear the
risks and losses associated with decision making, under-utilisation, sluggish sales or R&D failure. These
enterprises are expected to maintain a reasonable level of profit.

Article 59 - Where payments between an enterprise and its related parties are offset, the tax authorities will
restore the transactions when conducting a comparability analysis and making special tax adjustments.
Article 60 - If an enterprise makes payments to overseas related parties that do not perform any functions or
assume any risks, nor have any substantial operating activities, the tax authorities have the right to make special
tax adjustments and disallow such payments in the calculation of taxable income.

Article 61 - If an enterprise carries out transactions with its related party located in a low-tax jurisdiction, and that
related party performs simple functions and assumes limited risks, the tax authorities may select that related
party as the tested party when conducting a transfer pricing analysis.

Article 62 - Where an enterprise conducts transactions with overseas related parties, and wishes to apply for tax
de-registration, the tax authorities shall perform a special tax adjustment risk assessment, with a focus on
whether there are any outbound transfers of intangibles at a low or nil consideration. If the enterprise fails to
comply with this regulation, the tax authorities shall conduct a special tax audit and make adjustments
accordingly.

Article 63 - Upon audit, if the tax authorities did not reach any of the following conclusions: the enterprise's
related party transactions did not satisfy the arm's length principle; the non-distribution or reduced distribution of
profits of CFCs did not have business needs; or the enterprise has entered into an arrangement without
commercial purposes that results in reduction, exemption or defer of tax payments, no special tax adjustments
would be made by the tax authorities. The tax authorities will officially conclude the tax audit and issue a "Notice
of Special Tax Audit Conclusion" to the audited enterprise.

Article 64 - Upon audit, if the tax authorities reached any of the following conclusions: the enterprise's related
party transactions did not satisfy the arm's length principle; the non-distribution or reduced distribution of profits of
CFCs did not have business needs; or the enterprise has entered into an arrangement without commercial
purposes that results in reduction, exemption or defer of tax payments, the tax authorities will make special tax
adjustments, based on the following procedure:
(1) Draft a preliminary special tax adjustment plan based on the calculation, verification and comparable analysis;
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(2) According to the preliminary special tax adjustment plan, the tax authorities will consult and negotiate with the
enterprise. The two parties will both appoint chief negotiators. The tax officers will prepare the "Negotiation
Notes", based on which the chief negotiators of both parties will sign and confirm. If the enterprise refuses to
sign, two or more tax officers may sign for record. If the enterprise refuses to negotiate, the tax authorities shall
issue a "Notice of Preliminary Special Tax Audit Adjustment".
(3) If the enterprise disagrees with the preliminary special tax adjustment plan, it should provide relevant
information within the period specified by the tax authorities. The tax authorities shall verify the information
carefully and make timely decisions after receiving such information.
(4) After reviewing the additional materials and making decisions accordingly, the tax authorities will issue a
"Notice of Preliminary Special Tax Audit Adjustment" to the enterprise. If the enterprise disagrees with the
preliminary special tax adjustment plan, it shall inform the tax authorities in writing within 7 days of receiving the
notice. The tax authorities shall arrange for further negotiations and deliberation after receiving the enterprise's
submission. Where the enterprise does not raise any disagreement within the time limit, the tax authorities may
regard this as agreement with the preliminary special tax adjustment plan; and
(5) If the enterprise does not raise any disagreement on the preliminary special tax adjustment plan, or refuses to
negotiate after raising the disagreement, or the tax authorities refuse to accept the disagreement raised by the
enterprise after deliberation, the tax authorities shall issue a "Notice of Special Tax Audit Adjustment" to the
enterprise.

Article 65 - After receiving the "Notice of Special Tax Audit Adjustment", the enterprise should pay the tax within
the specified period, and adjust the accounting records accordingly. If the enterprise does not make the
accounting adjustments, the corresponding taxable income shall be deemed to be dividends already distributed
to the shareholders, and the applicable taxes payable.
Where relevant accounting records have been adjusted, the tax authorities should follow up closely on whether
funds are remitted back to the enterprise in relation to the corresponding taxable income, and may order the
enterprise to do so within a specified period. If the enterprise is unable to meet this requirement, it would be
deemed to have not adjusted the accounting records, as stated above.
Where the remitted funds are in foreign currencies, the middle price of the foreign exchange rate on the date of
remittance should be used to calculate the amount of corresponding taxable income to be remitted into China.

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Article 66 - Where an enterprise receives the "Special Tax Audit Adjustment Notice" and raises no
disagreement, or where an enterprise receives the notice but raised disagreement and then finally determined
the adjustment plan through legal remedies such as administrative appeal or litigations, the enterprise should
arrange to pay the other relevant taxes related to the special tax adjustments and notify the respective
responsible tax authorities accordingly.
If the enterprise does not report and pay such taxes timely, the respective responsible tax authorities may order
the enterprise to report and pay the taxes within a specified period. Any late payments will be subject to the
relevant regulations.

Article 67 - Where the special tax adjustments made are related to outbound payments of interest, leasing fees,
royalties, etc., there will not be any refund of withholding taxes already paid.

10 10 6
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Article 68 - In cases where the enterprise's related party transactions did not satisfy the arm's length principle; or
the non-distribution or reduced distribution of profits of CFCs did not have business needs; or the enterprise has
entered into an arrangement without commercial purposes that results in reduction, exemption or defer of tax
payments, the tax authorities have the right to make tax adjustments within 10 years from the year the
transactions took place i.e. within 10 years from June 1 of the year following the tax year when the transactions
took place to the day when the "Notice of Tax Audit" was served.

Chapter 6 Intangibles

Article 69 - This regulation defines "intangibles" as something that is not a physical asset or financial asset that
is owned or controlled by the enterprise for use in commercial activities, and its use or transfer would be
compensated had it occurred in a transaction between independent parties in comparable circumstances.
Intangibles typically include:
(1) Technology related intangibles, such as: patents, non-patented technology, trade secrets, etc.;
(2) Market related intangibles, such as: trademarks, brands, client lists, distribution channels, market research,
franchises government licences, etc.; and
(3) Other types.
Article 70 - Owners of intangibles include both legal owners and economic owners.
"Legal owners" refers to the ownership of intangibles defined through legal registrations, relevant contracts, etc.
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"Economic owners" refers to organizations or individuals whose economic activities substantially contribute to the
value of intangibles, i.e. perform functions, invest resources and assume risks in the development, enhancement,
maintenance, protection, exploitation and promotion of the intangibles.

Article 71 - Returns derived from the intangibles include income derived from the use of intangibles, the transfer
of rights to use intangibles, or the transfer of ownership of the intangibles.

Article 72 - Allocation of returns derived from the intangibles should match with the economic activities and value
contribution made by each party. In allocating the returns, the share of contribution to the value of intangibles
made by each party needs to be determined by considering the functions performed, assets employed, risks
assumed; capital or funding contributed, human resources and other support made by each party in the
development, enhancement, maintenance, protection, exploitation and promotion of the intangibles, and how the
value of the intangibles is realized.
(1) Functions which contribute to the value of intangibles include management and control of research and
development projects, design of marketing plans, direction and planning for creative undertakings, conducting
research and development activities, collection and analysis of market data, establishment of distribution
channels, management of client relationships, brand promotion and protection, as well as localizing the
development, trial production, mass production, quality control, and other activities;
(2) Risks arising during the course of developing and exploiting the intangibles include the risk that costly R&D or
marketing activities will prove to be unsuccessful; the risk of product obsolescence; infringement risk; and product
liability and similar risks related to products and services based on the intangibles.
(3) Participants that only contribute funding or capital, without performing any functions or assuming
corresponding risks in the development and exploitation of the intangibles, should only be entitled to a
reasonable return on capital; participants that are merely the legal owners of the intangibles, without making any
contribution to the value of the intangibles, should not be entitled to share any returns derived from the
intangibles.
(4) When measuring the appropriate return to each economic owner of intangibles, consideration should be given
for the technological factors which contribute to value creation for technology related intangibles; and market
factors and local activities which contribute to value creation for market related intangibles.

Article 73 - When determining the returns derived from the intangibles and the allocation of appropriate returns
to each related party, a comprehensive analysis should be conducted on various value creation factors, including
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the global business processes of the multinational group, the interaction of the intangibles with other functions,
assets and risks of the global business, location specific factors such as market premium and locations savings,
group synergies, and other factors.

Article 74 - When determining the appropriate returns for each related party, the comparable uncontrolled price
method, profit split method and other reasonable methods such as the value-contribution allocation method and
the asset valuation method.

Article 75 - Where related parties pay royalties for the rights to use the intangibles, timely adjustments should be
made to the royalty amounts under the following situations:
(1) There are fundamental changes to the value of the intangibles;
(2) According to business practice, the royalty contractual provides a mechanism for adjusting the royalties;
(3) There are changes to the functions performed, assets employed and risks assumed by each related party
during the exploitation of the intangibles; and
(4) The licensee performs development, enhancement, maintenance, protection, exploitation and promotion
functions for the licensed intangibles.

Article 76 - Royalties paid between related parties for the transfer of rights to use the intangibles should be in
proportion to the economic benefits enjoyed by the transferee. For royalties paid by an enterprise on intangibles
which do not bring the enterprise any economic benefits, tax authorities have the right to make special tax
adjustments on the enterprise, in which the royalties would be non-deductible when assessing its taxable income.
If a holding company incorporated in a low tax jurisdiction and with no commercial substance uses its equity
interest in its Chinese domestic enterprise as consideration for the purchase of intangibles, economic ownership
of the intangibles should belong to the Chinese domestic enterprise and the associated expenses incurred for the
transaction can be treated as deductible expenses for the Chinese domestic enterprise. For royalties paid by the
Chinese domestic enterprise to the holding company, tax authorities have the right to make special tax
adjustments on the Chinese domestic enterprise, in which the royalties would be non-deductible when assessing
its taxable income.

Article 77 - Returns from the transfer of ownership of intangibles should be calculated by deducting the costs of
intangibles and expenses incurred in the course of transfer from the transfer price.
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Asset valuation methods such as income method, market method and cost method can be used for determining
the transfer price when transferring ownership of intangibles.
The costs of intangible should be governed in accordance with the EIT Implementation Rules.

Article 78 - The development and transfer of technology related intangibles can be carried out by signing a cost
sharing agreement.
Related parties that collectively develop and transfer intangibles by entering into cost sharing agreement should
comply with Chapter 9 of this regulation.

Chapter 7 Intra-Group Services

Article 79 - A service fee received from or paid to a related party must satisfy the following conditions:
(1) The underlying service is a beneficial service; and
2. The service fee is calculated in accordance with the arms length principle.
Article 80 - A "beneficial service" is defined as a service that brings economic benefits, either directly or indirectly,
to the service recipient, and that an independent enterprise would be prepared to pay for the service or undertake
the service by itself in the same or similar circumstances. The following are not considered to be beneficial services:
(1) The related party provides a service that the service recipient has already received from a third party or has
undertaken by itself.
(2) Any service to control, manage or supervise the service recipient, with the aim of protecting the investment
interests of the shareholders, directly or indirectly, including shareholder activities such as board of directors
meetings, shareholder meetings, and board of supervisors meetings; services related to the analysis of and
preparation of the operational and financial reports for the investors, group headquarters or regional headquarters;
financing activities in relation to the operations and capital investment of the investors, group headquarters or
regional headquarters; and financial, tax, human resources, legal and other service activities for the purpose of the
groups decision making, monitoring, control and compliance.
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(3) Obtaining incidental benefits attributable solely to the enterprise being part of the group of companies without
receiving an actual service provided by a related party. The incidental services include synergy effects and
economies of scale resulting from the group's change in legal form, debt restructuring, equity acquisition, asset
acquisition, merger and division, and other group reorganisation activities; increase in the value of property or land
use rights resulting from a real estate project undertaken by related parties; reduction in financing costs due to the
higher credit rating of the group or companies, and other similar situations
(4) Any service for which the service provider has already been compensated by the service recipient through other
related party transactions, including a situation where technical services in relation to a license arrangement of a
patent or know-how have been compensated through the royalties for the patent or know-how, where lendingrelated financial services have been compensated through the relevant interests, and any other similar situations.
(5) Any service that is irrelevant to the functional profile of and risks assumed by the service recipient or any service
that is not required for the service recipient's business operation.
(6) Any other service that does not bring economic benefits, either directly or indirectly, to the service recipient, or
if an independent party would not be willing to pay for the service or undertake the service by itself.

Article 81 - The service fee for a beneficial service should be determined using a number of factors, including the
details and nature of the services, capabilities of and costs of the service provider, the extent of the benefits to the
service recipient, the business environment, the financial positions of both the service provider and recipient, and
the service fee that would be charged by an independent party, and other factors. The service provider should
select an appropriate pricing model in accordance with the provisions of Chapter 4 of this regulation and comply
with the following rules:
(1) Where services are provided to related parties and it is possible to identify service costs for each service item
and the corresponding service recipient, the service fee should be determined based on a reasonable cost plus an
arm's length mark-up;
(2) Where services are provided to related parties and it is not possible to identify service costs for each service
item and the corresponding service recipient, the service fee should be determined based on the total costs of
providing the services plus an arm's length margin, and apportioned to the service recipients on a reasonable
apportionment basis. Any costs incurred for the provision of non-beneficial service should not be included in the
calculation of the allocation base. Allocation criteria, such as sales, operating assets, number of employees, labor
costs, machinery usage, data usage, working hours, and other reasonable criteria, should be reasonably selected
based on the nature of the service. The apportionment results should be consistent with the level of benefits
received by the service recipients.

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Article 82 - For an enterprise paying a service fee to its related parties for a non-beneficial service, the tax
authorities have the right to make special tax adjustments on the enterprise, in which the service fee would be nondeductible when assessing the taxable income.
For beneficial services where the service fee does not satisfy the arm's length principle, the tax authorities have
the right to adjust the service fee by applying an appropriate transfer pricing method.

Article 83 - Enterprises should prepare, retain and provide the following special issue file to the tax authorities
upon request:
(1) The relevant contract or agreement and any related information that can prove the authenticity of the service.
(2) The specific activities, features and service delivery model, the payment form and service fee amount, and the
benefits received by the recipient.
(3) Method of grouping and allocating the service costs, including the approach to grouping the costs, breakdown
of cost items and values, as well as the allocation criteria, allocation keys and ratio calculations used to determine
the service fee.
(4) Transfer pricing method for the service fee, the reasons for choosing that pricing method, and other relevant
factors affecting the pricing method.
(5) Indicating whether the enterprise or related parties entered into same or similar service transactions with a third
party. If such transactions exist, the enterprise should provide the details of the pricing method for those
transactions.
(6) Pricing method used by other related parties in the same group and the service fee charged to each related
party.

Article 84 - For enterprises using a cost-sharing agreement for providing or receiving services, Chapter 9 of this
regulation is also applicable to those arrangements.

Chapter 8 Advance Pricing Arrangements

Article 85 - Enterprises may enter into an APA with the tax authorities in respect of the pricing principles and
calculation methods for its related party transactions in future years. APAs shall be handled by tax authorities
who are in charge of special tax adjustments.
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6 3
Article 86 - An APA process generally has six phases including a pre-filing meeting, formal application, review
and evaluation, negotiations, signing of the agreement, and monitoring and execution. An APA may be concluded
either unilaterally, bilaterally or multilaterally.
3 5
Article 87 - An APA applies to related party transactions occurring during the three to five consecutive years after
the year in which the a formal written APA application report is filed.
The signing of an APA will not affect special tax adjustments or supervision imposed by the tax authorities on the
enterprise in relation to its related party transactions during the year in which the formal APA application is filed
("filing year") or any prior years.
6 1 10
If the related party transactions in the filing year and prior years are same as or similar to those covered in the
APA, upon the application of the enterprise, the tax authorities may apply the agreed APA terms in relation to the
pricing principle and calculation method to evaluate and adjust such related party transactions of the enterprise
provided that the roll-back period does not exceed 10 years. The roll-back period starts from 1 June of the year
following the tax year in which the related party transactions took place to the day when the notification of starting
formal APA negotiation was served to the enterprise.

Article 88 - Prior to a formal application for an APA, an enterprise shall submit a written notice of intent for an
APA, and the tax authorities, upon receiving the taxpayers written request, will conduct a pre-filing meeting with
the enterprise to discuss related issues and the feasibility of the APA and prepare "Meeting Minutes of APA
Meeting". A pre-filing meeting can be conducted on an anonymous basis.
(1) For unilateral APAs, enterprises shall submit a written notice of intent for an APA together with a draft APA
application report, and conduct the pre-filing meeting with the tax authorities. The draft APA application report
should include:
1.
a. Relevant group organizational chart, company structure, related party relationships and related party
transactions;
2. 5
b. Financial and accounting statements, information on products and assets for the previous five years;
3.
c. Types of related party transactions involved and tax years to be covered by the APA;
4.
d. Allocation of functions performed and risks assumed between each relevant related party and the basis of
such allocations, such as organizational structure, personnel, expenses, assets, etc.;
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5.
e. Applicable transfer pricing principles and calculation methods, the functional and risk analysis, comparability
analysis and the critical assumptions, etc. that support the proposed transfer pricing principles and the calculation
method;
6.
f. Market conditions, including future trends and the competitive environment of the relevant industry;
7.
g. Annual business scale, profit and loss forecasts and business plans for the years covered by the APA;
8.
h. APA related information in respect of related party transactions, business arrangements and profit level;
9.
i. Possibility of double taxation; and
10.
j. Any related issues concerning relevant domestic and foreign laws and tax treaties.
(2) For bilateral or multilateral APAs, enterprises should submit a written notice of intent for an APA to both the
SAT and the tax authorities-in-charge, and simultaneously submit the draft APA application report. The SAT will
arrange for pre-filing meetings with the enterprise. In addition to the items as listed above in (1), the draft APA
application report and pre-filing meetings should particularly include following:
1.
a. Status of the APA applications to the competent tax authorities of the counterparty country of an applicable tax
treaty;
2. 5
b. Details of the previous 5 years of business operations and related party transactions of the related parties
which are relevant to the APA; and
3.
c. Proposed pricing principles and calculation methods to be used in the APA submitted to the competent tax
authorities of the counterparties under the tax treaty.
(3) During the pre-filing meeting, the tax authorities may request the enterprise to submit supplementary
materials, for analysing and evaluating documents and materials that reflect the enterprise's operational plan,
future trends, and business scope with a focus on the feasibility analysis, investment budget and results, and
decisions by the board of directors, etc. The tax authorities will also conduct a comprehensive analysis of the
relevant information and materials that reflect the enterprise's operational performance, such as financials,
accounting reports and audit reports, etc.
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(4) During the pre-filing meeting, the tax authorities may conduct field visits and enquiries to review the
enterprise's functions and risks.
15
(5) The tax authorities shall inform the enterprise whether the formal negotiations on APA related issues can
proceed within 15 days from the day when the agreement is reached on the factual information of the related
party transactions and the selection of transfer pricing method during the pre-filing meeting. A "Notice of Taxation
Matters" shall also be served at the same time. Where the tax authorities are unable to reach agreement with the
enterprise in a pre-filing meeting, the tax authorities shall reject the APA application lodged by the enterprise and
state any reasons therefor, and terminate the APA procedure.
3
Article 89 - Within three months after the enterprise has received notification from the tax authorities with respect
to starting the formal APA negotiations, the enterprise should submit a formal written APA application report to
the tax authorities which is prepared based on the format and content of the draft APA application report as well
as the agreements reached in the pre-filing meeting, and file a "Formal APA Application". For a bilateral or
multilateral APA, the enterprise should submit the "Formal APA Application" and the "Application for Initiating
Mutual Agreement Procedure" to the SAT and the tax authorities-in-charge simultaneously.
The enterprise may request an extension for the submission of the formal written APA application report with the
tax authorities and file the "Extension for Submission of the Formal APA Application" for the following special
reasons:
(1) Certain materials require special preparation;
(2) There are certain issues to be addressed regarding materials to be submitted, such as translation; and
(3) Other non-subjective reasons.

15
The tax authorities will send the "Notice of Taxation Matters" to the enterprise within 15 days of receiving the
extension request in writing from the enterprise. The enterprise may consider its requested extension as
accepted by the tax authorities if no reply is given within 15 days.
If the enterprise neither files a formal written APA application report within the specified period nor applies for an
extension, the enterprise's application for APA will be deemed to be terminated.
Article 90 - After receiving a formal APA application report and related documents and materials from an
enterprise, the tax authorities will review and evaluate the APA application, and may ask for supplemental
information following their review and evaluation.
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The tax authorities may review and evaluate the APA application from the following perspectives:
(1) Functions and Risks: The tax authorities will distinguish between the respective functions performed by the
enterprise and its related parties in procurement, production, transportation, sales; the respective ownership of
intangible assets based on their contribution to R&D; and the risks assumed with respect to inventory, credit,
foreign exchange and the overall market, by the enterprise and its related parties respectively.
(2) Comparable Information: The tax authorities will analyze and evaluate the domestic and overseas
comparable pricing information provided by the enterprise to explain the material differences between that
comparable information and that of the APA applicants, and adjustments should be made accordingly. If the tax
authorities are unable to confirm the reasonableness of the comparable transactions or operations, the tax
authorities will specifically ask the enterprise to provide additional documents and materials to justify that the
proposed transfer pricing principles and calculation method are appropriate for the related party transactions
under review and the economic reality, and that there is relevant financial and operational information to support
the approach.
(3) Critical Assumptions: The tax authorities will analyze and evaluate the influential factors and their effect on the
enterprises profitability and operation in order to identify appropriate assumptions for the APA.
(4) Proposed Transfer Pricing Principles and Calculation Method: The tax authorities will analyze and evaluate
whether and how the proposed transfer pricing principles and calculation method may be accurately applied to
past, current and future related party transactions, as well as the financial and operating results. The tax
authorities will also evaluate whether the proposed transfer pricing principles and calculation method satisfy the
laws and regulations.
(5) Arm's Length Range of Prices or Profit: The tax authorities will determine the range of prices or profit which is
acceptable to both tax authorities and the enterprise based on the review and evaluation of the identified
comparable prices, profit margins , and transactions of comparable entities.

Article 91 - The tax authorities shall negotiate with the enterprise following the review and evaluation of a
unilateral APA application. After reaching consensus, the tax authorities should submit the draft APA and
evaluation conclusions to the SAT for its review and approval.
For a bilateral or multilateral APA, the SAT will negotiate with the competent tax authorities of the counterparty
country (or region), and the draft APA will be prepared if consensus can be achieved.
A draft APA shall include the following:
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(1Names, addresses and other basic information about the related parties;
(2) Related party transactions involved and years covered;
(3) Selected comparable prices or transactions, transfer pricing principles and calculation method, expected
operating results, etc.;
(4) Definitions and application of the transfer pricing principles and calculation method;
(5) Critical assumptions;
(6) Enterprises obligations including annual reporting, maintenance of relevant records, notification when
assumptions are changed, etc.;
(7) Legal effects of the APA, confidentiality of the documents and materials;
(8) Clauses on the responsibilities of the parties;
(9) Amendments to the APA;
(10) Dispute resolution methodology and procedures;
(11) Effective date; and
(12) Relevant appendices.

Article 92 - After the tax authorities and the enterprise have reached an agreement on a draft unilateral APA,
legal representatives or their appointed persons from both sides will formally sign the APA.
After the SAT and the competent tax authorities of the counterparty country (or region) have reached an
agreement on the draft bilateral or multilateral APA, representatives from the SAT and corresponding competent
tax authority' from the counterparty country or their empowered delegates will formally sign the bilateral or
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multilateral APA. The local tax authorities-in-charge will sign an "Implementation Agreement for Bilateral or
Multilateral APA" with the enterprise according to the bilateral or multilateral APA.
When the APA involves tax adjustments on the related party transactions in the year when the application is filed
and in years prior to that year, the tax authorities shall calculate the additional tax payable or tax refunds on a
year-to -year basis and issue a "Special Tax Audit Adjustment Notice" to the enterprise.

Article 93 - Before the conclusion of the APA, either the tax authorities or the enterprise may suspend or
terminate the APA procedure. For bilateral or multilateral APAs, the APA procedure may be suspended or
terminated subject to the consultation between the tax authorities in charge of each side. Where the tax
authorities suspended or terminated the APA procedure, it shall issue a "Notice of Taxation Matters" to the
enterprise and state reasons for the suspension or termination. Where the enterprise suspended or terminated
the APA procedure, it should submit an explanation to the tax authorities.

Article 94 - The tax authorities should monitor the execution of the APA.
(1) During the APA execution period, the enterprise should keep relevant documents and materials, including
accounting books and relevant records, in good condition and not lose, destroy or remove such items. The
enterprise should provide the tax authorities with an annual report on the execution of the APA within 5 months of
the tax year-end.
The annual report should include a description of the operations and the status of compliance with the APA by
the enterprise including all the requirements of the APA. The annual report should also indicate whether the
taxpayer wishes to revise or effectively terminate the APA. If there are particular outstanding or forthcoming
issues, the enterprise should also explain such issues in the annual report in order to negotiate with the tax
authorities regarding whether the APA should be revised, or terminated.
(2) During the APA execution period, the tax authorities shall conduct an annual inspection on the execution of
the APA. The inspection will cover the following:
Whether the enterprise has abided by the terms and requirements of the arrangement;
Whether the materials and annual report provided by the enterprise for negotiating the APA reflect the
actual operations of the enterprise;
Whether the materials and calculation method supporting the transfer pricing method are correct;
Whether the critical assumptions are still valid; and
Whether the application of the transfer pricing method by the enterprise is consistent with the critical
assumptions.
If the enterprise hides the facts or refuses to comply with the APA terms, the tax authorities will revoke the APA
retroactively to the first year that the APA was in effect and notify the enterprise in writing. If the enterprise is
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found to have other violations of the APA terms, the tax authorities will take necessary steps or even terminate
the APA dependent upon the actual circumstances.
Where the APA was revoked retroactively or terminated, the tax authorities may conduct a special tax audit on
the enterprise.
(3) During the APA execution period, if the actual operating results of the enterprise are outside the agreed range
of prices or profits, the tax authorities have the right to make adjustments to the enterprise's actual operating
results targeting the median of the agreed range of prices or profits. After the APA execution period, if the
weighted average of actual operating results of the enterprise for the APA covered years is below the median of
the agreed range of prices or profits, the tax authorities have the right to make adjustments to the enterprise's
actual operating results targeting the median of the agreed range of prices or profits. Under a bilateral or
multilateral APA, the APA execution performance will ultimately be reported to the SAT for its review via each
level of local tax authorities.
30
30
(4) During the APA execution period, if there are any substantial changes affecting the APA, the enterprise
should notify the tax authorities within 30 days of these changes occurring. The notification should explain in
detail the impact of the substantial changes on the APA and also attach relevant supporting materials. If the
enterprise cannot report in time due to non-subjective reasons, the enterprise may request for an extension for
the notification. The extension, however, will not exceed 30 days.
60
Within 60 days after receiving the enterprise's written notification, the tax authorities shall evaluate the notification
and take the necessary steps, including reviewing the changes, negotiating with the enterprise to revise the APA
terms and relevant conditions, or based on the extent of impact of such substantial changes on the execution of
the APA, take reasonable steps to revise or terminate the APA. After the termination of the original APA, the tax
authorities may re-negotiate and sign a new APA with the enterprise in accordance with the procedures and
requirements of this Chapter.
(5) If the APA is jointly signed by the state tax bureau, local tax bureau and the enterprise, the enterprise should
submit the annual report and the report regarding substantial changes to both the state tax bureau and the local
tax bureau. The state tax bureau and the local tax bureau shall jointly inspect and review the execution of the
APA by the enterprise.

Article 95 - Tax authorities may prioritize the formal application based on the following factors:
(1) The enterprise is able to submit the full and comprehensive materials as required by the APA application, with
a clear and complete analysis on the value chain or supply chain taking into consideration any location specific
factors such as market premium and cost savings, and the proposed transfer pricing principle and calculation
methods are reasonable
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(2) The enterprise proactively cooperates with the tax authorities in the review and analysis process.
(3) For a bilateral APA, the competent tax authorities in other countries are very eager to conclude the APA, and
consider the APA application to be of high importance.

Article 96 - Tax authorities may reject the written notice of intent for an APA submitted by the enterprise under
the following situations, and notify the enterprise by issuing a "Notice of Taxation Matters":
(1) Before submission of the written notice of intent for an APA, the tax authorities have already initiated a special
tax audit on that enterprise.
(2) Where the enterprise wishes to apply for an APA renewal, the weighted average profit of the enterprise fell
below the median of the interquartile range during the APA period.
(3) The enterprise fails to prepare contemporaneous documentation.
(4) The enterprise fails to file related party transactions reporting documents.

Article 97 - Tax authorities may reject the formal APA application submitted by the enterprise under the following
situations:
(1) The advance pricing proposal submitted by the enterprise does not meet the arm's length principle.
(2) Consensus cannot be reached during the pre-filing stage.
(3) The enterprise refuses to provide relevant information requested by the tax authorities, or refuses to provide
additional and/or corrected information if the information originally provided does not meet the requirements of
the tax authorities.
(4) The enterprise refuses to cooperate with the tax authorities when conducting the field visits and enquiries to
understand functions performed and risks assumed by the enterprise and related parties.
(5) Other situations where an APA is not appropriate.
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90
Article 98 - The APA is automatically invalid upon expiration of the execution period. The enterprise may notify
the tax authorities of its intention to renew the APA within 90 days before the expiration of the execution period of
the existing APA.

Article 99 - Where a unilateral APA involves tax authorities in two or more different provinces, autonomous
regions, municipalities or cities specifically designated in a State plan or involving both state tax bureaus and
local tax bureaus, the enterprise group may appoint one of its group entities in Mainland China to act as the
representative. The tax authorities-in-charge of that entity will be responsible for the APA negotiations, with coordination from the SAT.
The SAT may collectively conclude an APA with the group covering all enterprises, or the respective tax
authorities may enter into corresponding APAs with the enterprise(s) under each tax authority's jurisdiction
respectively.
Article 100 - Once an APA is negotiated and signed by the enterprise with the tax authorities, so long as the
enterprise complies with all the terms and requirements of the arrangement, the respective state tax bureaus and
local tax bureaus will respect and implement the arrangement.
Article 101 - Both the tax authorities and the enterprise should keep confidential all the information and materials
obtained during the pre-filing, formal negotiation, review, and analysis phases. The tax authorities and the
enterprise will take meeting minutes for each meeting, make records of the number of copies and the content of
the materials exchanged by both parties, and have the record signed and endorsed by the chief negotiators of
both parties.
Article 102 - If the tax authorities and the enterprise fail to conclude an APA, the non-factual information related
to the enterprise such as proposals, reasoning, ideas and judgments, etc. obtained during the discussion and
negotiation should not be used later in tax audits of the transactions covered by the failed APA.
Article 103 - In the execution of an APA, if any disagreement arises between the tax authorities and the
enterprise, both parties will resolve the disputes through negotiation. If the two parties cannot resolve their
disputes through negotiation, the case may be brought to the tax authorities at the upper level, or ultimately to the
SAT. Where a bilateral or multilateral APA is involved, the case must be brought to the SAT for mediation. The
in-charge tax authorities should accept and implement the decisions made by the tax authorities at the higher
level or the SAT. However if the enterprise is still unable to accept the results of the mediation or decisions made
by the upper level tax authorities or the SAT, the APA should be terminated.
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Chapter 9 Cost Sharing Agreements
Article 104 - CSAs concluded by an enterprise and its related parties should adhere to the provisions of this
Chapter for the joint development or assignment of intangible assets, or the joint provision or receipt of services.
Article 105 - Participants of a CSA are entitled to the rights to benefit from the joint development or assignment
of intangible assets, or receipt of service activities, and therefore should bear the corresponding costs of such
activities. The results of a CSA are jointly owned by the CSA participants.
CSA participants are not required to pay royalties for the use of intangible assets developed or received from
CSAs.
When an enterprise and its related parties share the costs under a CSA, they should ensure that the sharing of
costs matches the expected benefits to be received. In determining the costs, the impact of location specific
factors should also be considered.
Article 106 - A reasonable measure of an enterprise's expected benefits associated with a CSA involving
intangible assets or services should be based on reasonable business assumptions and normal business
practice.
The indicators for measuring expected benefits should reflect the characteristics of the intangible assets or
services. The indicators must not be altered once selected, unless under exceptional circumstances.
Article 107 - A CSA involving services is generally applicable to group purchases and group marketing activities.
Article 108 - A CSA mainly includes the following information:
(1) Participants names, country of residence, related party relationships, and the rights and obligations of the
agreement;
(2) The description of intangible assets or services associated with the CSA, as well as the information on which
party(ies) actually conducts the R&D or service activities with their function and risk profile.
(3) The duration of the CSA.
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(4) The methodology and assumptions used for calculating the expected benefits of the participants, as well as
the rationale for selecting the indicators for measuring the benefits.
(5) Value, form, and valuation method for the initial investment made by participants and the follow-up costs, as
well as an explanation demonstrating compliance with the arm's length principle.
(6) Participants' application of applicable accounting principles and explanation of adjustments.
(7) Method for adjusting for differences between actual and expected benefits.
(8) The procedure and provisions for participants to join or exit the agreement.
(9) The conditions and provisions for compensating payments between participants.
(10) The conditions and provisions for the amendment or termination of the CSA.
(11) The provisions for the use of a CSA outcome by non-participants.
30
Article 109 - Upon signing a CSA, enterprises should submit to the tax authorities a copy of the concluded
(amended) CSA, together with the required information, within 30 days from the day of concluding or amending
the CSA.
Article 110 - The tax authorities shall strengthen the management and monitoring of the implementation of a
cost-sharing agreement, focusing on the following:
(1) Functions and risks specifically assumed by the participants
(2) Determination and measurement of costs incurred by participants.
(3) Assumptions made, indicators and methodology adopted for calculating the expected benefits for the
participants.
(4) Guidelines on buy-in payments for new participants.
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(5) Guidelines on buy-out payments for participants exiting the CSA.
(6) Changes to the entitlement to benefits and the share of costs after a change in the participants of a CSA.
(7) The methodology for adjustment when there are significant differences between actual benefits and expected
benefits.
For an enterprise failing to deal with the aforementioned situations in accordance with the arms length principle,
the tax authorities have the right to make special tax adjustments.
Article 111 - Compensating payments received by an enterprise to adjust its costs incurred in a CSA to match
with its benefits from the CSA shall be included in the taxable income of the enterprise in the year the
adjustments are made; in cases which involve intangible assets, such an adjustment shall be treated in
accordance with the provisions under the EIT Law and its Implementation Rules.
Article 112 - Enterprises can conclude a CSA in the form of an APA according to Chapter 8 of this regulation.
Article 113 - During the implementation of a CSA, an enterprise must prepare, maintain and according to the
request of tax authorities, submit a special issue file with the following information:
(1) Copy of the CSA;
(2) Other agreements reached among the CSA participants in relation to the implementation of the CSA;
(3) Details of how any parties that are not participants of the CSA have used the outcomes of the CSA, and the
amount or form of the payment made by them for using the outcome; as well as the allocation method for sharing
the payment amongst the CSA participants.
(4) Information on any participants joining or exiting the CSA during the fiscal year, including the name of the
joining and exiting parties, their country (region) of residence, the related party relationship, and the amount and
form of the buy-in payment or buy-out compensation.
(5) Details of an amendment or termination of the CSA, including the reasons, and the treatment or allocation of
the existing CSA outcomes.
(6) The total cost and a breakdown of the specific costs from the CSA during the current fiscal year.
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(7) Information on the cost allocation to the participants during the current fiscal year, including the amount, the
form and to which party(ies) the allocated costs were paid, and the amount, the form and to which party(ies) the
adjustments were made or paid/received.
(8) A comparison of the expected benefit and the actual benefits from the CSA, and the corresponding
adjustments made during the current fiscal year.
(9) The calculation of expected benefits, including selection criteria for the measurement indicators, the
calculation method as well as any reasons for changes to these.
5 31
During the implementation period of a CSA, enterprises should complete the contemporaneous special issue file
specified for a CSA before May 31 of the following year for each fiscal year regardless of whether the CSA was
concluded in the form of an APA.

Chapter 10 Controlled Foreign Corporations (CFC)
50%
Article114 - A CFC, as cited in Article 45 of the EIT Law, refers to a foreign enterprise controlled by Chinese
resident enterprises and/or Chinese individual residents, and established in a country where the effective tax rate
is 50% lower than the tax rate prescribed in Paragraph 1 of Article 4 of the EIT Law.
Article 115 - The term Control includes:

10%
50%
(1) Where any single one of the Chinese resident enterprises and/or Chinese individual residents directly holds or
indirectly holds more than 10% of the total voting shares of a foreign enterprise as at the end of a tax year, and
all of such Chinese residents jointly hold more than 50% of the total shares of the foreign enterprise.
(2) Where the shareholding percentage requirement of item (1) above is not met, but the Chinese resident
enterprises and/or Chinese individual residents have substantial control over the foreign enterprise's
shareholding, financing, business operations, purchase and sales, etc. as at the end of a tax year.
10%
Article 116 - The following defines situations where direct / indirect shareholdings of any single Chinese resident
enterprise or Chinese individual resident are more than 10% of the total voting shares of a foreign enterprise:
(1) The Chinese resident enterprise or Chinese individual resident directly hold shares in the foreign enterprises.
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(2) The Chinese individual resident indirectly hold shares in the foreign enterprises via other individuals related by
marriage, lineal descent, three degrees of blood relationship and other relationships.
(3) The Chinese resident enterprise indirectly hold shares in the foreign enterprises via other domestic related
parties.
50% 100%
The aggregate shareholding in a foreign enterprise by a Chinese resident under a multi-tier shareholding
arrangement is calculated by multiplying the shareholding percentage of each tier. Where an intermediary
enterprise holds over 50% of the shares of a lower tier entity, the shareholding percentage of the intermediary
enterprise in the lower tier entity will be deemed as 100% in calculating the shareholding percentage of the
ultimate shareholding percentage in the lower tier entity.
50%
50%
Article 117 - An effective tax rate lower than 50% of the tax rate prescribed by Paragraph 1 of Article 4 of the EIT
Law refers to the situation where the taxes (of a similar nature as EIT) actually paid by the CFC in its country of
residence is lower than 50% of the tax that was calculated by multiplying the taxable income of the CFC
assuming the PRC EIT Law was adopted.
Article 118 - Pursuant to Article 45 of the EIT Law, in cases where the CFCs do not distribute profits or
distributes less profit than it should, not because of reasonable business needs, such profits will be attributed to
the Chinese resident shareholders and included when calculating a shareholder's taxable income.
Article 119 - Profits of CFCs attributed to the PRC resident shareholders are referred to as attributable income.
In determining whether the profits of a CFC is attributable income, the following should be considered:
(1) Whether the employees of the CFC make substantive contributions to the company.
(2) To analyze the groups value chain and the respective entities which undertake key functions, and assuming
the group affiliates operate under arm's length conditions, to determine whether the CFC owns the relevant
assets, assumes relevant risks, and is remunerated commensurate with its assets and risks.
(3) To analyze whether the CFC possesses sufficient staff with relevant skills and necessary business spaces to
justify the level of income it receives.
(4) Other reasonable methods.
In general, in the following situations, a CFC shall be deemed to have received attributable income:
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(1) Dividend income is received by a CFC not engaged in securities trading.
(2) Interest income is received by a CFC not engaged in financing business.
(3) Insurance income is received by a CFC not engaged in insurance business.
(4) A CFC receives royalty income from related parties.
(5) Sales income generated by a CFC through purchasing goods or services from its related parties and the
resale of those goods or services with no or low value added.
(6) Income received by a CFC from the transfer of intangibles or risks, and such return exceeds a normal level.
Article 120 - If the Chinese resident enterprise is able to provide supporting information that one of the following
conditions is satisfied, the profits of the CFC may be exempt from being included as taxable income of the
Chinese resident:
500
(1) The current year retained earnings is less than RMB 5 million.
50%
(2) Attributable income accounts for less than 50% of the CFCs current income.
(3) Non distribution or low distribution of profits is due to reasonable business needs, which could be
substantiated by, for example, a business plan to invest the profits in production and operations, or other
investments and operational activities, or evidences showing that the aforementioned activities already took
place.
Article 121 - Attributable income imputed to the current income of a Chinese resident enterprise shall be
calculated as follows:
=
Attributable income imputed to the current income of a Chinese resident enterprise
= Attributable income of CFC Shareholding percentage of the Chinese resident enterprise
Shareholding percentage of a Chinese resident enterprise will be calculated by multiplying the shareholding
percentage of each tier.
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Article 122 - A Chinese resident enterprise must honestly report the information of foreign investments and
income, and attach relevant financial statements, and tax returns of the foreign enterprises.
Chinese resident enterprise shareholders of the CFC shall, during the annual enterprise income tax filing,
honestly report the income imputed to the PRC resident enterprise in the current period, and pay the relevant
taxes.
Article 123 - Tax authorities, when implementing special tax audits on Chinese resident enterprises, Chinese
resident individuals and their CFCs, are entitled to request information concerning the CFCs from the PRC
resident enterprises and individuals.
Article 124 - If the CFC and the Chinese resident enterprise adopt different taxable year ends, the attributable
income from the CFC will be included in the Chinese resident enterprise's tax year which covers the year-end
date of the CFC.
Article 125 - If the attributable income imputed to a PRC resident is already subject to overseas tax of a similar
nature as the EIT, the overseas tax may be credited in accordance with the relevant provisions of the respective
tax treaties and the EIT Law and its Implementation Rules.
Article 126 - If the attributable income has already been included in the Chinese resident's income and taxed in
accordance with Article 45 of the EIT Law, such income will be excluded from the Chinese resident's taxable
income when it is actually distributed.

Chapter 11 Administrative Guidance Concerning Thin Capitalization

Article 127 - According to Article 46 of the EIT law, for the purpose of computing taxable income, the nondeductible interest expense should be computed as follows:
=1-/
Non-deductible Interest Expense = annual interest accrued to related party 1- standard ratio / related party
debt-to-equity ratio of the enterprise
Where the standard ratio is the ratio as stipulated by the Ministry of Finance and State Administration of Taxation
in accordance with Article 119 of EIT Implementation Rules.
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The related party debt to equity ratio refers to total debt investment received from related parties (subsequently
referred to as the "related party debt investment") versus equity investment.

Article 128 - The related party debt investment includes the following debt investments from related parties that
are interest bearing.
(1) Related party debt investment from a group cash pool;
(2) Short-term and long-term liabilities payable to related parties which are interest bearing (including interestbearing liabilities payable to related parties arising from payment in arrears);
(3) Other related party debt investments.

Article 129 - The related party debt-to-equity ratio is computed as follows:
/
Related party Debt-to-Equity Ratio = weighted average related party debt investment of the year / weighted
average equity investment of the year
i i /365;
Where:
Weighted average related party debt investment of the year = book value of each related party debt investment
(i) number of borrowing days of the related party debt investment (i) / 365
i i /365
Weighted average equity investment of the year = book value of each equity investment number of investment
days of the equity investment / 365

Article 130 - Equity investment is the amount of shareholders' equity recorded on the balance sheet. If the
amount of shareholders' equity is less than the sum of paid-in capital and capital reserve, equity investment is
equal to the sum of paid-in capital and capital reserve. If the sum of paid-in capital and capital reserve is less
than the amount of paid-in capital, equity investment is equal to the amount of paid-in capital.

Article 131 - Interest expenses include accrued interest directly or indirectly incurred on related party debt
investment, guarantee fees or mortgage fees paid to related parties relating to the related party debt investment,
interest re-characterized as a result of special tax adjustments, finance costs on finance leases, nominal interest
on derivative financial instruments or agreements relating to related party debt investment, exchange gains or
losses derived from related party debt investment, and other expenses of a similar nature.
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Article 132 - Non-deductible interest expense may not be carried forward to the following tax years, and should
be allocated among related parties in proportion according to the interest actually accrued to each related party.
Interest allocated to domestic related parties with an effective tax rate not lower than that of the enterprise will be
allowed as tax deductible. Interest actually paid to overseas related parties either directly or indirectly will be
regarded as a dividend distribution, and the additional tax liability should be computed based on the difference in
the withholding income tax rates between dividend and interest. There will be no refund on withholding tax
already paid, if the withholding income tax rate of interest is higher than that of dividend.

Article 133 - If the enterprise claims an interest expense deduction on the related party debt investment in
excess of the standard related party debt to equity ratio, the enterprise should prepare, maintain and submit the
following special issue file upon tax authorities' request, in order to prove that the amount, interest rate, term,
financing requirements, and debt to equity ratios of the related party debt investment, etc. are all in compliance
with the arm's length principle:
(1) Analysis of borrowers solvency and borrowing ability;
(2) Analysis of borrowing ability of the group and its financing structure;
(3) Explanation of changes in equity investment such as the registered capital;
(4) Explanation of the nature, and purposes of the related party debt investment and the market condition when
the financing was received;
(5) Currency denomination of related party debt investment, the amount of principal, interest rate, term and
financing conditions;
(6) Whether an independent entity would be able and willing to accept the financing conditions, principal amounts
and interest rate;
(7) Condition of collateral provided by the enterprise in order to obtain the related party debt investment;
(8) Condition of the guarantors and conditions on which the guarantee is provided;
(9) Interest rate of loans of a similar nature, and financing conditions;
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(10) Conditions for convertible corporate bonds; and
(11) Other documents that can prove compliance with the arm's length principle.

Article 134 - If an enterprise fails to prepare, maintain and provide contemporaneous documents to prove that
the amount, interest rate, term, financing requirements, and the debt to equity ratios of the related party debt
investments satisfy the arm's length principle, the interest expenses accrued on related party debt investment in
excess of the standard ratio will not be deductible for EIT purpose.

Article 135 - "Accrued Interest" as cited in this Chapter refers to interest recorded by the enterprise as relevant
costs or expenses as required by the relevant provisions of the EIT Law and its Implementation Rules.
If there are any concerns relating to the transfer pricing of interest actually accrued to related parties, the tax
authorities should first conduct a transfer pricing audit and adjustment in accordance with relevant provisions as
stated in Chapter 5 of this regulation.

Chapter 12 General Anti-Avoidance
Article 136 - Tax authorities may initiate a general anti-avoidance audit on enterprises with tax avoidance
arrangements for the sole purpose of obtaining a tax benefit and without a bona fide commercial purpose.
Article 137 - The following tax avoidance arrangements may be subject to general anti-avoidance audits:
(1) Abuse of tax incentives.
(2) Abuse of tax treaties.
(3) Abuse of a company's legal form.
(4) Tax avoidance through a tax haven; and
(5) Other arrangements without bona fide commercial purpose, with the sole or main purpose of obtaining a tax
benefit.
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Article 138 - A tax benefit refers to any reduction, exemption or deferral of EIT payable. When determining
whether there is any tax benefit involved in an arrangement, the tax authorities should consider economic
substance, the outcome of the arrangement as well as its impact on the enterprise. They should then select
appropriate alternative arrangements which may achieve a similar commercial outcome but without the tax
avoidance, and compare it against the arrangement undertaken by the enterprise.
If the enterprise attempts to disguise any related party transactions by way of an agency, trust or other
arrangements, the tax authorities may re-define such arrangements to be related party transactions based on the
economic substance.
Article 139 - The tax authorities should comprehensively review the following factors based on the substance
over form principle when determining whether an enterprise has a tax avoidance arrangement as stated in this
chapter:
(1) Form and substance of the arrangement.
(2) Conclusion time and execution period of the arrangement.
(3) Implementation method of the arrangement.
(4) Relationship between each step or part of the arrangement.
(5) Changes in the financial performance of each party involved in the arrangement.
(6) Tax consequences of the arrangement.
(7) Relationship between each party in the arrangement.
(8) Other relevant factors.
Article 140 - If the arrangement entered into by the enterprise is related to transfer pricing, CSA, CFC, thin
capitalization etc., the provisions specific to each respective issue should be applied first.
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If the arrangement entered into by the enterprise is related to beneficial ownership, limitation-of-benefits, etc., the
relevant tax treaty provisions should be applied first.
If the specific rules above are unable to revoke tax benefits obtained by the enterprise from the tax avoidance
arrangement, the tax authorities may then initiate a general anti-avoidance audit and make adjustments.

Chapter 13 Monitoring of Profit Level
Article 141 - Tax authorities should have a focus on risk management, strengthen the monitoring of enterprise
profit levels, build and develop an indicator system for monitoring the profit levels of related party transactions,
dynamically manage the special tax issues, and enhance the compliance with tax laws by enterprises.
Article 142 - Tax authorities, according to local conditions, should develop a risk rating mechanism within the
indicator system, and implement corresponding countermeasures for different enterprises bearing different risk
ratings. The authorities should provide special tax adjustment guidance and risk warnings on related party
transactions for low to medium risk enterprises that are willing to comply, and should conduct special tax audits
on high risk enterprises that are unwilling to comply.
Article 143 - Enterprises should consciously improve their compliance with tax laws. Tax authorities can
evaluate an enterprise's level of compliance with respect to their related party transactions through review of the
related party transactions reporting forms, contemporaneous documentations and testing of the internal control
system of the enterprise in relation to related party transactions, and incorporate the evaluation results into the
aforementioned risk rating mechanism.
Article 144 - Tax authorities should guide and urge enterprises to fulfil their legal obligations of reporting the
related party transactions, and strengthen the review and analysis of the information provided in the related party
transactions reporting forms.
Article 145 - Tax authorities should strengthen the promotion and management of the contemporaneous
documentation policy, and conduct reviews according to work requirements. Tax authorities should focus on a
review of the description of pricing system, function and risk analysis, the groups' value chain profit level and
profit allocation, the selection of the pricing method, supporting pricing data and any other relevant information
disclosed by the enterprises.
Article 146 - Based on work requirements, tax authorities should conduct risk information collection, and focus
on testing the tax compliance level of enterprises which prepared contemporaneous documentations, including
testing the establishment and operation of these enterprises' internal control system with respect of their related
party transactions.
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Article 147 - Tax authorities should, through establishing interdepartmental information sharing and collaborating
with each other, regularly collect information of enterprises that have related party transactions, including their
manufacturing operations, group structure, profits level and their functions and risks with respect to their global
value chain; make use of internal administrative information; and together with information from other government
departments and external sources, build a database for the purpose of special tax adjustments.
Article 148 - By guiding enterprises to comply with tax regulations with respect to special tax adjustments, tax
authorities should encourage enterprises to self-adjust their taxable revenue or income according to the relevant
provisions and report such adjustments made to the tax authorities.
Tax authorities reserve the right to conduct special tax audits and adjustments on enterprises which have already
made self-adjustments.
Article 149 - With respect to those enterprises on which special tax adjustments have been made, tax authorities
should conduct follow up management with respect to their operations, changes in related party transactions and
profit levels, and guide them to comply with the arm's length principle.
Article 150 - Tax authorities should continuously enhance the related party transactions risk management
indicators, warning indicators, and the rationality as well as the practicality of the risk model, in order to optimize
the indicator system for monitoring the profit level of related party transactions.

Chapter 14 Corresponding Adjustment and Mutual Agreement
Article 151 - "Mutual Agreement" in this chapter refers to the relevant provisions of a tax treaty entered into with
the PRC which specifically deals with the resolution of international double taxation, through consultations
between the SAT and the competent authority of the tax treaty contracting party.
For enterprises for which the SAT has accepted their bilateral or multilateral APA application, mutual agreement
procedures should be launched according to relevant provisions of the tax treaty and in accordance with the
provisions of Chapter 8 of this regulation.
Article 152 - The SAT should, based on an enterprise's application, or requests of the competent authority of the
tax treaty contracting party or in any other necessary circumstances, carry out mutual agreement procedures in
accordance with the relevant provisions of the tax treaty.
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Article 153 - An enterprise that applies to initiate the mutual agreement procedure should submit the "Application
form for Initiating a Mutual Agreement Procedure" concurrently to both the SAT and the tax authorities-in-charge
in writing, together with relevant information regarding the special tax adjustments imposed.
Article 154 - The SAT should launch the mutual agreement procedure upon receipt of the acknowledgement
letter of initiating mutual agreement procedure from the competent authority of the tax treaty contracting party
and that the SAT considers the application complies with the relevant provisions of the tax treaty.
Article 155 - The SAT may reject an application for initiating a mutual agreement procedure by an applicant or
the competent tax authorities of the tax treaty contracting party, or request additional information in any of the
following circumstances:
(1) The matters of mutual agreement procedure are outside the scope of the tax treaty;
(2) The application for mutual agreement was raised outside the prescribed time limit;
(3) The request obviously lacks a factual or legal basis; or
(4) Facts and materials provided are incomplete or unclear to the extent that the tax authorities are not able to
carry out investigations or verifications.
Regardless of the abovementioned circumstances, if the SAT considers that it is advantageous to avoid double
taxation; to safeguard the interests of China's tax revenue; or the promotion of economic cooperation, the SAT
may still accept the application for initiating mutual agreement procedure by the enterprise or the competent
authority of the tax treaty contracting party.
Article 156 - Tax authorities should promptly send the result of mutual agreement procedures to the relevant
enterprises, levy additional tax or make tax refunds accordingly.
For taxable revenue or income calculated in foreign currency, it should first be converted into Renminbi before
calculating the additional tax or tax refund amount. The conversion rate for translating foreign currency into
Renminbi should be the middle price of the prevailing exchange rate on the last day of the month preceding the
day when the result of the mutual agreement procedure is delivered to the enterprise.
Article 157 - The SAT may terminate the mutual agreement procedure process in any of the following
circumstances:
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(1) The applicant conceals important facts deliberately, or there are frauds involved in the submission;
(2) The applicant refuses to provide information requested by the tax authorities which is necessary to the
application;
(3) The applicant and the tax authorities are not able to obtain the necessary evidence, which causes certain
facts or the applicants' position cannot be proven and hence not possible to continue the mutual agreement
procedure;
(4) The competent tax authorities of the tax treaty contracting party unilaterally refuse or terminate the mutual
agreement procedure;
(5) The applicant of the mutual agreement procedure requests to terminate the mutual agreement procedure; or
(6) There are other circumstances which mean the mutual agreement procedure cannot proceed.

Chapter 15 Legal Liability
Article 158 - Where an enterprise fails to submit the annual report on related party transactions to the tax
authorities, or maintain contemporaneous documentation and other relevant information in accordance with
provisions of this regulation, the relevant matters shall be dealt with in accordance with Article 60 and Article 62
of the Tax Collection Law.
Article 159 - Where an enterprise and its related parties refuse to provide information on its related party
transactions such as contemporaneous documentation, or provide false or incomplete information which do not
genuinely reflect its related party transactions, the relevant matters shall be dealt with in accordance with Article
70 of the Tax Collection Law and Article 96 of the Tax Collection Law Implementation Rules, Article 44 of the EIT
Law and Article 115 of the EIT Implementation Rules.
2008
1 1
Article 160 - When implementing a special tax adjustment in accordance with the provisions of the EIT Law and
its Implementation Rules, the tax authorities shall impose an interest charge based on the underpaid tax amount
for the related party transactions entered into after January 1, 2008. The interest shall be charged on a daily
basis.
6
1
6 1
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(1) Where an enterprise makes an advance tax payment prior to receipt of the Special Tax Adjustment Notice, or
pays taxes prior to the date upon which the tax falls due for payment, interest shall be accrued from June 1 of the
year following the tax year to which such tax is attributed until the date of tax payment (or prepayment); where an
enterprise fails to pay taxes within the period as specified in the Special Tax Adjustment Notice, interest shall be
accrued on June 1 of the year following the tax year to which such tax is attributed until the tax payment due
date, and a late payment surcharge should be imposed from the day following the tax payment due date.
12 31
5 365
(2) The interest rate will be 5% plus the basic RMB lending rates published by the Peoples Bank of China for
loans having the same term as the underpaid tax on 31 December of the tax year to which the underpaid tax is
attributed. The daily interest rate is calculated based on the above annual rate assuming 365 days per year.
(3) If an enterprise provides contemporaneous documentation and other relevant information in accordance with
this regulation, or is exempt from preparation of contemporaneous documentation in accordance with this
regulation but provides other relevant documents based on request from the tax authorities, the interest may be
charged based on the basic lending rate and without the additional 5%; and
If an enterprise considers itself to be exempt from preparation of contemporaneous documentation according to

this regulation, but upon a tax audit, was determined by the tax authorities that its actual related party transaction
amount reaches the threshold for preparation of contemporaneous documentation, the tax authorities shall apply
Item 2 of this Article and calculate interest based on the basic lending rate plus an additional 5%.
(4) The aforementioned interest charges shall not be deducted when computing the taxable income for enterprise
income tax purposes.
Article 161 - The enterprise should pay the taxes levied as a result of the special tax adjustments and interest
accrued on the adjustments within the period specified in the special tax adjustment notice issued by the tax
authorities. Where the enterprise fails to pay the taxes within the specified period, the tax authorities shall apply
Article 32 of the Tax Collection Law and other relevant provisions.

Chapter 16 Supplementary Provisions
Article 162 - During a special tax audit and adjustment, all levels of state tax bureaus and local tax bureaus
should strengthen communication and may establish a joint audit team, if necessary.
Article 163 - All personnel of the tax authorities should keep confidential and only use the information submitted
by an enterprise in accordance with the relevant laws and regulations.
3
Article 164 - If the last day of the specified period, as prescribed by this regulation, is a statutory holiday, the day
following the end of the holiday will be taken as the last day of the specified period. If there are 3 consecutive
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days of statutory holidays covered in the period, the period will be extended by the number of the days in the
holidays.
Article 165 The term "country" as used in this regulation refers to a country or region with tax jurisdiction.
Article 166 - Any term such as "more than", "less than", "exceed(s)" certain amount, and "within" or "prior
to/before" a certain date in this regulation includes the certain amount or date itself.
Article 167 - If an enterprise, during a special tax audit, performs tax de-registration, the tax authorities-in-charge
may decide not to allow the tax de-registration before the audit and adjustment is concluded.
.
Article 168 - This regulation shall become effective on [ ]. The Implementing Measures for Special Tax
Adjustments (for Trial Implementation) shall be annulled as of the same date. In the event of any inconsistency
between the relevant regulations issued prior to the promulgation of this regulation and the provisions herein, this
regulation shall prevail. Any tax matters not yet resolved will be handled in accordance with this regulation.
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Unofficial Translation by Deloitte

For reference only

Implementation Measures of Special Tax Adjustment

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(7) Both parties are related by means of other interests.

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Article 11 - Related party transactions include the following categories:

(6) Equity transfer; and

(7) Other types of related party transactions.

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(3) A limited function and risk entity which has a loss.

(1) Has a related party service transaction.

(2) Has a CSA in place.

(3) Breaches the thin capitalization regulations.

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(1) Transfer of the legal ownership of or right to use tangible assets

(3) Transfer of the right to use or legal ownership of intangible assets.

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(2) Enterprises with long-term losses, marginal profit or fluctuating profit;

(3) Enterprises with a profit level below the industry level;

8. Enterprises that set up controlled foreign corporations in a low tax jurisdiction;

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9. Enterprises that conduct a business arrangement without a reasonable commercial purpose;

10. Enterprises that do not satisfy the arm's length principle.

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(3) Other types.

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(1) There are fundamental changes to the value of the intangibles;

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(1) The underlying service is a beneficial service; and

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(1) Certain materials require special preparation;

(3) Other non-subjective reasons.

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A draft APA shall include the following:

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(2) Related party transactions involved and years covered;

(5) Critical assumptions;

(8) Clauses on the responsibilities of the parties;

(9) Amendments to the APA;