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	CIRCULAR OF THE STATE ADMINISTRATION OF TAXATION ON THE ISSUE OF CAPITAL ADJUSTMENT IN THE TAXATION ADMINISTRATION OF TRANSFER PRICING

	(No. 745 [2005] of the State Administration of Taxation July 28, 2005)


SUBJECT : CORPORATE TAX; TRANSFER PRICING; CAPITAL ADJUSTMENT
ISSUING DEPARTMENT : THE STATE ADMINISTRATION OF TAXATION
ISSUE DATE : 07/28/2005
IMPLEMENT DATE : 07/28/2005
LENGTH : 275 words
TEXT :

In recent years, some provinces or municipalities have adjusted the capital discrepancy between investigated enterprises and comparable enterprises in such work as tax auditing of transfer pricing and the talk and signing of negotiated pricing while some haven't adjusted it. In order to do a good job in such anti-tax evasion work as the tax auditing of transfer pricing and the talk and signing of negotiated pricing and further elevate the quality and benefits of comparable analysis, we hereby clarify the relevant issues on capital adjustment as follows:

The capital adjustment is an indicator that is used to adjust the profit as based on the working capital (including receivables, payables and inventories, etc.) for reflecting the discrepancy of business profits between an investigated enterprise and a comparable enterprise due to the different use of working capitals. Therefore, in the comparison of profits between an investigated enterprise and a comparable enterprise, where there is a certain difference in working capital (e.g. payables, receivables and inventories), the impact of interest costs as indicated in the working capital shall be adjusted so as to work out the business profit that is economically reliable and elevate the comparability of the profit of the comparable enterprise. However, taking the real situation into account, analysis results show that the development of our listed companies is still imperfect and the comparability of comparable enterprises is weak, we suggest that all regions may not make any capital adjustment on comparable enterprises. Where the choice of a comparable enterprise is accurate and the comparability thereof is comparatively high, a capital adjustment may be carried out upon the approval of the State Administration of Taxation.