April 14, 2021
China clarifies procedures for processing payments for transfer pricing adjustments
Following the release of Huifa  No. 14 (Circular 14) in August 2020, China’s State Administration of Foreign Exchange (SAFE) recently provided guidance on the principles and procedures that banks should follow when verifying and processing requests for cross-border payments in certain scenarios, including cross-border payments relating to transfer pricing (TP) adjustments. The SAFE has also clarified various administrative issues related to foreign currency receipts/payments categorized as services.
In the detailed guidance, the SAFE clarified that banks should verify the authenticity and legal compliance of the commercial transactions and ensure that requests for foreign currency receipts/payments are consistent with and reflective of the underlying transactions. The SAFE also specified the documentation requirements for the following three types of adjustments:
The guidance provided by the SAFE is seen as a positive sign of an increase in flexibility for cross-border transactions, including TP adjustments. However, as the development of detailed documentation requirements is delegated to local SAFEs and banks, practical uncertainties still exist. For example, it is unclear if local SAFEs and banks would allow payments for TP adjustments initiated by taxpayers and their related parties (i.e., TP self-adjustments) in the absence of written documents from tax authorities. Moreover, customs duty and import VAT implications should also be considered for TP adjustments relating to buy/sell transactions.
Taxpayers should closely monitor developments in local practice and if necessary, revisit existing TP policies and documentation. Multinational corporations that intend to implement cross-border TP adjustments with their China subsidiaries should consider engaging professional advisors to coordinate and assist with negotiations with relevant government authorities and banks.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Services Limited, Hong Kong
Ernst & Young Ernst & Young (China) Advisory Limited
Ernst & Young LLP (United States), China Tax Desk
Ernst & Young LLP (United Kingdom), China Tax Desk, London
Ernst & Young LLP (United States), Asia Pacific Business Group, New York