Announcement of the SAT on Regulating the Administration of Cost Allocation Agreements (“Announcement”) has come into force on 16th July 2015

Recently, SAT has released “Announcement”, compared with “Circular of the State Administration of Taxation on Printing and Distributing the Implementing Measures for Special Tax Adjustments (for Trial Implementation)” (Guo Shui Fa [2009] No.2), Announcement has discentralized the approval right and strengthen the afterwards management on the management of the cost allocation agreements. The main contents as follows:

Requirement for the record-filing of the cost allocation agreements

The cost allocation agreement shall be filed to the local tax authorities instead of SAT.

The annual report of related party transactions shall be submitted while submitting the annual income tax report.

The management principle shall be afterwards management instead of prior examination

The enterprises could conduct the cost allocation agreement without the prior examination of tax authorities.

Despite the arm’s length principle as prescribed in Guo Shui Fa [2009] No.2, Announcement has furtherly prescribed that the cost allocation agreement shall comply with the principle that the cost and share shall be matched. Otherwise the tax authorities would be entitled to make adjustment.

Compensate the adjustments

Despite the compensation as prescribed in Guo Shui Fa [2009] No. 2, Announcement has furtherly clarified if the actual costs that the participants share do not match the actual benefits received, the participants shall compensate the adjustments based on the actual situation. If the participants fail to compensate the adjustment, the tax authority would initiate a special tax audit.

Announcement reflects a tendency that the government would decentralize the administration management right, but strength the afterwards management. For those enterprises, the afterwards management and the relevant documents and data shall be paid special attention to.