In its ongoing efforts to control tax evasion, China's State Administration of Taxation (SAT) has recently published an instruction (Tax Office General Fa [2014] No 146), calling on national and local tax bureaus to investigate transfer pricing practices of Chinese enterprises.

Under scrutiny by the SAT are all transactions involving unreasonable payment of service fees and royalties to related parties located in no or low-tax jurisdictions. The SAT is focussing on transactions carried out between 2003 and 2013, which do not have any reasonable business purpose or economic substance.

Among other things, the SAT is investigating: services fees paid to a shareholder (including services performed in relation to planning, monitoring, and management of the enterprise); service fees that do not relate to the services performed; royalties paid to related parties located in tax havens; and royalties paid to foreign related parties who do not assume any functions.

The SAT has asked the tax bureaus to complete their investigation and submit a report by September 15, 2014.