The Chinese State Administration of Taxation (SAT) recently issued a public notice regarding certain corporate income tax matters on outbound payments to overseas related parties (SAT Public Notice  No.16, hereinafter referred to as Public Notice 16). The SAT office released its interpretation of Public Notice 16 (SAT´s Interpretation) the next day, through its official website.
According to this new regulation, outbound payments, service fees or royalties to overseas related parties will not be deductible for corporate income tax (CIT), if they do not meet a few criteria outlined in Public Notice 16. It also states that the payments should follow the arm’s length principle, and addresses substance and documentation requirements.
We believe that Public Notice 16 reflects SAT´s efforts to protect its tax base and demonstrates China´s support of the overall BEPS initiatives with local implementation of measures imposed on Chinese enterprises. Substance and documentary evidence are likely to be key issues on which there will be vigorous debates on interpretation involving taxpayers and tax administrations.
For any further questions please contact your usual PwC contact or me.