banner

Foreign Invested Company Conceals Related Party Transactions, Investigated and Adjusted by the Tax Bureau with Over 1.2 Million Yuan in Back Taxes! Featured

Friday, 24 January 2025 13:41

 

 

Company M is a Sino-foreign joint venture manufacturing enterprise, established by Singapore-based Company H and China-based Company F. Company F holds 65% of the equity, while Company H holds 35%. After formal production began, the company's sales revenue has been steadily increasing year by year. However, in stark contrast, the company's gross margin and sales profit margin have remained at a low level, and even losses have occurred, which attracted the attention of the tax authorities.

 

Ninety percent of the products produced by Company M are sold to the related party, Company H in Singapore, which then sells them to overseas customers. Tax officials subsequently reviewed the details of Company M's declarations and found that it had not filed the "Annual Summary of Related Party Transactions."

 

The tax department conducted an anti-avoidance investigation into Company M and discovered that the overall profit margin of its overseas related party transactions was lower than that of non-related party transactions both domestically and internationally, suggesting the possibility of profit shifting. The reasonableness of the transfer pricing in related party transactions between Company M and Company H became the focus of the investigation team's review.

 

Company M admitted to concealing the fact of related party transactions. However, the relevant person in charge of Company M believed that as the agent for its international market, Company H undertook significant risks and high costs, and thus it was reasonable for it to obtain higher profits without any issue of related party interest transfer.

 

Nevertheless, after gathering evidence from multiple sources, the tax authorities found that, in terms of functional positioning, Company M integrates research and development, procurement, and production. Although Company M signed an overseas sales contract with Company H, the export sales orders showed that the goods were directly shipped by Company M to the destination, with Company H only acting as an intermediary. From this, it was determined that Company H only undertook limited sales functions, while Company M bore most of the risks, and the profits obtained by both parties were clearly not proportional to the functions and risks undertaken.

 

Ultimately, the tax bureau made a tax adjustment decision in accordance with the law, and Company M paid over CNY 1.2 million in corporate income tax.

 

Dongjin Reminder: Related party transactions of multinational enterprises are a key area of supervision by tax authorities. Companies should follow the arm's length principle to ensure the reasonableness of transfer pricing in related party transactions and must not use related party transactions to shift profits. Otherwise, the tax bureau has the right to make tax adjustments based on the average profit rate of similar enterprises in the market. If companies refuse to cooperate, they will not only need to pay back taxes but may also face severe tax penalties.

 

If you have any questions, they are welcome to consult Dongjin at any time.

 

Mike Chang

Partner

mikechang@shanghaiinvest.com

Contact Us


Mr. Mike Chang

Partner


Phone

+86.21.6886 8321


Fax

+86.21.6886 8021


Connect Us