The tax risk of improper signing of cross-border transaction contracts is “approaching the door”
Source: China Tax News
Data from the National Bureau of Statistics shows that in the first quarter of 2022, my country’s total import and export of goods was 9,415.1 billion yuan, a year-on-year increase of 10.7%. Among them, exports were 5,226 billion yuan, an increase of 13.4%; imports were 4,189.1 billion yuan, an increase of 7.5%. With the in-depth development of economic globalization, the cross-border business activities of Chinese enterprises are becoming more and more frequent. In practical work, the author found that many enterprises did not consider tax-related matters in a comprehensive manner when signing contracts, resulting in ambiguous expression of contract terms and improper attribution of results, which may bring tax risks to the enterprises.
Risk point 1: The terms of the contract are broad and vague
◆Typical Case◆
Domestic company A and its overseas parent company signed two consecutive product design contracts with a total amount of nearly 50 million yuan. From the perspective of the contract content, the two contracts are simple framework contracts. Except for the different names of the designed products, the rest of the two contracts are very similar. There is no detailed description of the designed products, and the two designed products cannot be identified through the contract. difference. At the same time, there are no specific provisions on the charging standards and settlement basis in the contract. It is only agreed that the actual payment will be made according to the requirements of the overseas parent company. From the perspective of the contract alone, it is impossible to determine whether the transaction object corresponding to the payment actually exists and whether the valuation is reasonable.
◆Analysis Suggestions◆
When an enterprise signs a contract, it should make sure that the terms of the contract are specific and clear in the expression of meaning, especially the description of the contract subject and payment standard should be clear and accurate. In practice, contracts with vague terms, broad content, unclear subject matter, and unclear pricing often indicate that both parties lack the proper balance of interests between independent enterprises. Such contracts may affect the tax authorities’ judgment on the authenticity of the relevant business activities and the reasonableness of valuation.
It should be reminded that if the enterprise cannot provide relevant materials to prove the authenticity of the contract and the rationality of the payment standard, there may be suspicion of improperly transferring profits through the channel of related payment. Once verified, the tax authorities have the right to make special tax adjustments.
Risk point 2: Related party transactions do not bring economic benefits
◆Typical Case◆
Company B, a domestic foreign-funded enterprise, signed a contract with Company C, a related party located in Hong Kong, China, and agreed to start paying consulting service fees to Company C from 2015 to develop the markets in Hong Kong, China and Taiwan, China. As of the end of 2020, Company B has paid a cumulative $1.5 million to Company C. When examining the external payment filing contract, the tax cadres found that the consulting service fee paid by Company B was a fixed amount, which was not linked to the corresponding business expansion, and the payment amount exceeded the sales growth in Hong Kong and Taiwan. In other words, the consulting service fee paid by Company B to Company C failed to bring corresponding benefits to the enterprise. At the same time, Company B was unable to provide information and explanations of Company C’s specific personnel and contract performance at the request of the tax authorities.
◆Analysis Suggestions◆
According to Article 35 of the Announcement of the State Administration of Taxation on Issuing the Measures for the Administration of Special Tax Investigation Adjustments and Mutual Agreement Procedures (Announcement No. 6 [2017 of the State Administration of Taxation, hereinafter referred to as “Announcement 6”) When the related party pays the price for non-beneficial services, the tax authority may implement tax adjustment in full according to the amount that has been deducted before tax. Non-beneficial labor services include related labor services that cannot bring direct or indirect economic benefits to the labor recipient. If the affiliated payment behavior of the enterprise cannot bring corresponding economic benefits to it, the behavior is likely to be abnormal. At the same time, if a domestic enterprise signs a contract with an enterprise that has no personnel or assets and has no commercial substance and ability to perform the contract and pays labor fees or royalties in a long-term direction, it may also constitute an illegal transfer of profits. Implement special tax adjustments.
Risk point 3: Improper attribution of results agreed in the contract
◆Typical Case◆
Domestic company D signed a technology use contract with an overseas affiliated company, and both parties agreed that company D only had the right to use the technology and paid 3% of the annual sales for the technology use fee. In order to produce products more in line with domestic needs, Company D invested a lot of manpower, material, and financial resources to improve the technology. At the same time, Company D also sent people to conduct market research on the product and upgraded the technology according to the research situation. With the transformation and upgrading of technology, company D’s sales have increased year by year, and the technology royalties paid to overseas related parties have also increased. However, Company D received no compensation for its contribution to this technological improvement.
◆Analysis Suggestions◆
Article 30 of Announcement No. 6 clarifies that when judging the contribution of an enterprise and its related parties to the value of intangible assets and the corresponding income distribution, a comprehensive analysis of the global operation process of the group to which the enterprise belongs shall be fully considered, and all parties shall be fully considered in the development of intangible assets, development and distribution of intangible assets. The value contribution in value enhancement, maintenance, protection, application and promotion, the realization of the value of intangible assets, the interaction of intangible assets and other business functions, risks, and assets within the group. At the same time, if the enterprise and its related parties have contributed to the subsequent development, value enhancement, maintenance, protection, application, and promotion of intangible assets, but have not received reasonable compensation, and the enterprise has not made timely adjustments when paying taxes, the tax authority may implement special tax adjustment.
Based on this, the author suggests that when affiliated enterprises sign a technology use contract, if the user is expected to improve the technology, the two parties should agree on the ownership of the new technology achievements or clarify the benefit compensation that the user can obtain by improving the technology. Ensure that both parties’ contributions to the value of intangible assets are matched with the distribution of income.
Risk point 4: Unreasonable payment of royalties
◆Typical Case◆
The E company located in China is a wholly-owned subsidiary of the overseas T company. In 2015, the two companies signed a contract, stipulating that starting from 2016, Company E will pay Company T a material patent and technology license fee, which is calculated on the basis of 5% of Company E’s annual sales. As of 2021, Company E has paid Company T more than $30 million. When examining company E’s external payments, tax officials found that since company E paid company T the patent and technology license fees, the company’s profitability has not improved significantly, and it has suffered losses in some years, which does not reflect the value of intangible assets. In this case, Company E has never adjusted the standard of patent and technology license fees.
◆Analysis Suggestions◆
According to Article 32 of Announcement No. 6, the royalties collected or paid by an enterprise and its affiliates for the transfer or transfer of the right to use intangible assets shall be commensurate with the economic benefits brought by the intangible assets to the enterprise or its affiliates. . If the taxable income or income of the enterprise or its related parties is reduced due to incompatibility with economic interests, the tax authority may implement special tax adjustment. If it does not bring economic benefits and does not meet the arm’s length principle, the tax authority may implement special tax adjustment in full according to the amount deducted before tax.
Royalties represent the value of the right to use intangible assets. If there is a lack of interest checks and balances among affiliated companies, the payment of royalties exceeds the use value of intangible assets, which may lead to inappropriate transfer of benefits from one party to the other. Therefore, when paying royalties to related parties, enterprises should pay attention to how much economic benefits this intangible asset can bring to the enterprise and try to avoid long-term fixed payment of royalties without an adjustment mechanism, and long-term losses still paid for the use of royalties. to avoid tax risks.
Risk point five: artificially split the contract to avoid tax obligations
◆Typical Case◆
Domestic company F purchased a batch of large equipment from company S located overseas, and the two parties signed 3 contracts for equipment installation. According to the contract, S Company will send 12 people to China to carry out equipment installation activities. The labor performance time of the three contracts is 76 days, 85 days, and 92 days respectively, all of which are less than 6 months. Require. However, in order to complete these three contracts, from the arrival of the first technician in China to the departure of the last technician from the territory of China, S Company sent staff to stay in China for a total of 235 days. The tax cadres visited and checked on the spot and found that the three contracts signed by F company and S company were related. When determining whether S company constituted a permanent establishment in my country, the three labor contracts should be restored to one contract, and the related personnel should be calculated continuously or cumulatively. length of stay in China.
◆Analysis Suggestions◆
The labor contract between enterprises should be based on the actual situation of the business activities. The behavior of Company F and Company S signing a contract for the same labor service split is suspected of artificially changing the business activities to avoid non-resident enterprises from fulfilling their tax obligations in my country, which may lead to the loss of tax in my country. The contract is the legal solidification of the taxpayer’s economic behavior, which contains the information of both parties, the content of the transaction, potential income, expenses, and related production factors. The author suggests that when signing contracts, companies should pay close attention to the compliance, relevance and authenticity of the contract content and actual business and pay taxes in compliance with the actual business situation.