“价格明显偏低且无正当理由”税收风险梳理

　　The obviously low price appears in the following laws and regulations:

　　According to Article 35-(6) ofThe Law of People’s Republic of China on the Administration of Tax Collection,where the basis for assessing taxdeclared by the taxpayer is obviously on the low side and without justifying grounds, tax authorities shall have the power to assess the amount of tax payable by him.

　　Value-added Tax: according to Article 16 ofRules for the Implementation of the Provisional Regulations on Value Added Tax of the People’s Republic of China(revised 2011),When a taxpayer's goods are sold or services taxable provided at aconspicuously low price without a proper reason as cited in Article 7 of the Regulations or when a taxpayer's activity without indication of the sales amount is deemed as sales of goods as provided in Article 4 of these Rules, the amount of sales shall be determined in order as follows...

　　Consumption Tax: According to Article 10 ofInterim Regulations of the People's Republic of China on Consumption Tax(revised2008), Where the taxable price of taxable consumer goods of a taxpayer is obviously low and without proper justification, the taxable price shall be determined by the competent tax authorities.

　　Land appreciation Tax: According to Article 9 ofProvisional Regulations of The People’s Republic of China on Land appreciation Tax, when the transfer price of real estate is lower than the assessed value without proper justification, the tax shall be assessed according to the assessed value of the real estate.

　　Deed Tax: According to Article 4 ofProvisional Rules of the People's Republic of China on Deed Tax, In case of realized price of the preceding paragraph obviously lower than the market price and without justifiable reasons or the difference in price for the land use right and housing exchanged is obviously irrational and without justifiable reasons, the basis shall be verified and determined by the collection organs with references to market price.

　　However, in the aspect of individual income tax law and enterprise income tax law, there is no direct clear regulation about obviously low price without proper justification (of course, you may think the Article 35 of The Law of People’s Republic of Chinaon the Administration of TaxCollection can be used to adjust obviously low price).

　　Individual income tax: According to Article 10 ofRegulations for the Implementation of the Individual income tax law of the People’s Republic of China, taxable income derived by individuals shall include cash, physical objects and negotiable securities. If the income is in the form of physical objects, the amount of taxable income shall be determined according to the price specified on the voucher obtained. If there is no receipt for the physical objects or if the price specified on the voucher is obviously on the low side, the tax authorities-in-charge shall determine the amount of taxable income by reference to the local market price, If the income is in the form of negotiable securities, the amount of taxable income shall be determined by the tax authorities-in-charge according to the face value and the market price.However, this is the determination of the amount of currency derived from non-currency, not of the obviously low trading price without proper justification.

　　Enterprise income tax:The Law of the People’s Republic of China on Enterprise Income Taxhas regulations on the associated transaction, which is Article 41: The business transactions between Enterprises and their affiliates that reduce the taxable income or income of such Enterprises and their affiliates not in compliance with independent transaction principle, the taxation authority has the right to make an adjustment in accordance with reasonable methods.

　　The available law doesn’t have clear regulation on the obviously low price, but we can find some reference inSupreme People’s Court Interpretation on Certain Questions Concerning the Application of the Contract Law of the People’s Republic of China(II). According to the Article 19, a transfer price not reaching seventy percent of the recommended price or market price of the place of transaction may generally be deemed as a price that clearly is unreasonably low.

　　II The judgement about “without justifying grounds”

　　“Without justifying grounds” is the other element or fact of the topic above.

　　The available tax system has regulations involving tax on “price is obviously low and without justifying grounds”, but the available policies and regulations haven’t solved the problem generally focused by both taxation bureau and enterprise, which is no clear, specific, unified recognition standards and operating rules about the distinction of “justifiable reasons”and “unjustifiable reasons” in the action of “price is obviously low”. In the practical exercise, the handlers often rely on their individual experience and understanding about policy to deal with it, lacking the seriousness of law. In some cases, the reasons proposed by enterprise are justifiable from the perspective of enterprise and employees, whereas maybe unjustifiable from the perspective of tax law and regulation.

　　There is clear regulation on the justifiable reasons of equity transfer in the judging process of justifiable reasons: according to theAdministrative Measures for Individual Income Tax on Incomes from Equity Transfer(Trail)(Announcement of the State Administration of Taxation[2014]No.67), with respect to the apparently low income from equity transfer, any of the following circumstances shall be deemed to be with legitimate grounds:(1) the invested enterprise have been enduring loss for continuous more than three years(three years included); (2) the equities are transferred at a low price due to the adjustment of the policy of the State;(3) the equities are inherited by or transferred to the spouse, parents,children, grandparents, grandchildren, siblings and the persons assuming the obligation to provide direct support to the transferor as proven by the legally effective personal status relationship certificates; (4) other reasonable circumstances which may be justified by valid evidence provided by the transferor and the transferee.

　　In other business activities,judging whether the trading price has proper justification may refer toLaw of the People's Republic of China for Countering Unfair Competition, the article11 of which defines: a taxpayer sells its or his goods at a low price, such sales do not come under acts of unfair competition in ant of the following events.(1) Selling fresh goods;(2) disposing of goods the useful life of which is about to expire, or of other overstocked goods;(3) seasonal lowering of prices;(4) selling goods at lowered prices for paying off debts, changing the line of production or closing the business.

　　When applying the justifiable reason to cases in China, if the low price causes the reduction of value-added tax in certain district or county, on account of China’s financial management system, enterprises may face continually increasing tax risks.

　　III The restrictions for adjustment method of tax authoritieswhen the price is obviously low without a proper reason

　　When the trading price is obviously low without aproper reason, the tax authorities shall have power to adjust the sales amount.

　　For example according to Article 16 ofRules for the Implementation of the Provisional Regulations on Value Added Tax of the People's Republic of China(revised 2011)(after business tax replaced by value-added tax, the relevant files also have the same sales amount identification order) , When a taxpayer's goods are soldor services taxable provided at a conspicuously low price without a proper reason as cited in Article 7 of the Regulations or when a taxpayer's activity without indication of the sales amount is deemed as sales of goods as provided in Article 4 of these Rules, the amount of sales shall be determined in orderas follows:

　　(一) At the average price of the goods of the same category sold in the same month;

　　(二) At the average price of the goods of the same category sold in a recent period of time;

　　(三) At the taxable value of the goods. The formula for computing the taxable value is:

　　The taxable value = costs X (1+ ratio of profit to cost)

　　With regard to goods subject to consumption tax,the consumption tax shall be added to the taxable value thereof.

　　The costs in the formula refer to actual production cost in the case of selling self-producing goods, and actual buying cost in the case of selling purchased goods. The ratio of profit to cost in the formula is determined by State Administration of Taxation.

　　When the amount of sales is determined at the taxable value of goods, the ratio of profit to cost in the formula is determined by State Administration of Taxation. According to Article 2-(4) ofAnnouncement of the State Administration of Taxation on the Issuance of the Provisions on Some Specific Issues Regarding Value-Added Tax (GSF[1993]No.154), If the selling prices of the taxpayers are obviously low or the taxpayers have no selling prices and if the taxable prices shall be formed as required to determine the value of sales， the cost-profit ratio in the price-forming formula shall be 10%.But if the consumption tax of the goods shall be collected according to the ad valorem ratio， the cost-profit ratio in the pricing-forming formula shall be the cost-profit ratio specified in theRegulations on Some Specific Issues regarding Consumption Tax.

　　Above all, it still needs the tax officer’s experience and fact to judge whether the price is obviously and without proper reasons. If associated transaction is involved, it may relate to the anti-tax avoidance investigation of China’s tax authorities.

　　(The description“Tax payers offer taxable services with obviously low or high prices and without reasonable business intention” in the issued document of “to replace the business tax with a value-added tax” in 2016,and some further discussions such as consumption tax and profit splitting of permanent establishment are left out in this article.“reasonable business intention and economic substance” appear most obviously in the laws and regulations of GAAR of China.)