the State Administration of Taxation

Notice of the State Administration of Taxation on Printing and Distributing the Implementing Rules for Negotiated Pricing for the
Transactions Among Associated Enterprises (for Trial Implementation)

No. 118 [2004] of the State Administration of Taxation

The Administrations of State Taxes and the Administrations of Local Taxes of all provinces, autonomous regions, municipalities directly
under the Central Government and the cities under separate state planning:

The Implementing Rules for Negotiated Pricing for the Transactions Among Associated Enterprises (for Trial Implementation) and the
samples of its various documentations (see annexes) are hereby printed and distributed to you, please carry them out accordingly.
If you encounter any problem during the process of implementation, please report to the Department of International Taxation of the
State Administration of Taxation in time so as to have them solved.

Annexes:

I.

Minutes of Talks for Negotiated Pricing (omitted)

II.

Notice on Formal Talk about Negotiated Pricing Arrangement (omitted)

III.

Formal Written Application for Negotiated Pricing Arrangement (omitted)

IV.

Report on Postponing the Submission of Formal Written Application for Negotiated Pricing Arrangement (omitted)

V.

Official Reply to the Formal Written Application for Postponing the Submission of Application for Negotiated Pricing Arrangement (omitted)

VI.

Preliminary Conclusion of Examination and Appraisal (omitted)

VII.

Notice on Postponing Examination and Appraisal (omitted)

VIII.

Form for Examination of the Preliminary Conclusion of Examination and Appraisal (omitted)

IX.

Negotiated Pricing Arrangement (Text for Reference) (omitted)

X.

Form for Approval of Negotiated Pricing Arrangement (Draft) (omitted)

XI.

Application for Renewing Negotiated Pricing Arrangement (omitted)

XII.

Official Reply to Application for Renewing Negotiated Pricing Arrangement (omitted)

XIII.

Form for Examination and Approval of Negotiated Pricing Arrangement (omitted)

XIV.

Report on Altering the Enforcement Term of Negotiated Pricing Arrangement (omitted)

XV.

Contacting Note for the Work of Negotiated Pricing Arrangement (omitted)

The State Administration of Taxation

September 3rd, 2004

The Implementing Rules for Negotiated Pricing for the Transactions Among Associated Enterprises (for Trial Implementation)

Chapter I General Provisions

Article 1

With a view to regulating the procedures for administering tax collection related to the negotiated pricing arrangement among the
associated enterprises, the present Implementing Rules are formulated in accordance with Article 36 of the Law of the People’s Republic
of China on the Administration of Tax Collection (hereafter referred to as “the Law on the Administration of Tax Collection”) and
Articles 51 to 56 of the Detailed Rules for its Implementation thereof (hereafter “the Detailed Rules”) as well as the relevant provisions
of the tax treaties entered into between the Chinese Government and the governments of other countries (hereafter referred to as
“tax treaties”) arrangement.

Article 2

The present Rules shall apply to the administration of tax collection related to the negotiated pricing arrangement among associated
enterprises. The term “administration of tax collection related to the negotiated pricing arrangement among associated enterprises”
refers to the specific administrative work such as talks, examination and appraisal, discussions, formulating and approval of negotiated
pricing arrangement as well as monitoring enforcement that are conducted by the competent tax authorities and the taxpayers on the
basis of free will, equality, and good faith and according to the present Rules in the dealings between the taxpayers and their associated
enterprises regarding the purchase and use of tangible assets, the transfer and use of intangible assets, the provision of labor
services and the financing of working capital, for which the taxpayers apply for determining in advance the principles of negotiated
pricing and ways of computation to be applied to the associated dealings so as to solve and determine the tax issues involved in
the associated dealings in future years.

Article 3

The term “the competent tax authorities at various levels” as mentioned in the present Rules refers to the tax administrations at
the level of districted cities and prefectures or above. The specific implementation shall be conducted by the international (foreign-related)
tax administrative organs set up within the tax administrations of the districted cities and prefectures or other tax administrative
departments.

Chapter II Preparatory Talks

Article 4

The competent tax authorities shall, before agreeing to the application for negotiated pricing arrangement officially submitted by
a taxpayer, hold preparatory talks in light of the request of the taxpayer on such issues as the arrangement of negotiated pricing,
the scope of negotiated pricing arrangement that require study and analysis. Such issues as the time, place and concrete content
of the preparatory talks shall be subject to the determination by both parties.

Article 5

Where a preparatory talk concerning any negotiated pricing arrangement is likely to be undertaken, the taxpayer shall, at the same
time of filing a written request to the competent tax authority, put forward a written suggestion or opinions regarding the following
aspects:

1.

the procedures for implementation:

(1)

suggestion for negotiated pricing arrangement;

(2)

time period for negotiated pricing arrangement;

(3)

the documents and materials to be submitted;

(4)

the reporting and monitoring after the negotiated pricing arrangement are approved;

(5)

whether the tax issues of previous years shall be solved through the negotiated pricing arrangement.

2.

concrete contents including:

(1)

information about the relevant associated enterprises;

(2)

information about the tax auditing of previous years;

(3)

the statement of the relevant business operations involved in the negotiated pricing arrangement;

(4)

information about relevant associated dealings both at home and abroad;

(5)

functional and comparability analysis (including the analysis of the market situation and the comparable prices available);

(6)

consideration of adjusting factors of the comparable information;

(7)

the principles of transfer pricing and the ways of calculation to be adopted, and the explanation of why they accord with the principle
of fair dealings;

(8)

the hypothetical conditions on which the transfer pricing principles and way of computation to be adopted are based;

(9)

the double taxation problems that may occur, including the procedures for mutual negotiation of tax treaties;

(10)

other things that need to be accounted for.

Article 6

When a preparatory talk concerned negotiated pricing arrangement is likely to be conducted, the competent tax authority shall, within
20 days as of receiving the written request as well as the preliminary suggestion and opinions of the taxpayer, give a written reply
to the taxpayer. If it does agree to the written requests of the taxpayer, it shall give its reasons in its reply. If it agrees to
the written requests of the taxpayer, it shall make a statement of the following aspects:

1.

for the procedures for implementation:

(1)

the feasibility of the relevant negotiated pricing arrangement;

(2)

the time schedule for the different stages of the discussion about the negotiated pricing arrangement, including the basic requirements
and the general provisions and principles of examination and appraisal and time periods;

(3)

other procedural issues that need to be accounted for.

2.

for the concrete contents, mainly stating:

(1)

the scope of application of the negotiated pricing arrangement;

(2)

the provisions on relevant tax treaties, and the possibility of coming into a consensus of negotiated pricing arrangement;

(3)

analysis and appraisal materials that should be supplied according to different types of associated dealings;

(4)

time for examination and approval;

(5)

the obligations and duties, etc. of both parties after the negotiated pricing arrangement are approved.

Article 7

Where the negotiated pricing arrangement of two or more parties to a tax treaty are concerned at the stage of preparatory talk, a
written report should be made in time to the State Administration of Taxation about the entirety of the preparatory talk. Where,
after the preparatory talks, both parties come in to a consensus, the competent tax authority should inform the taxpayer in written
form within 15 days after the consensus is reached, and it may hold formal negotiations about the negotiated pricing arrangement
matters. After the formal negotiations about the negotiated pricing arrangement and before the conclusion of negotiated pricing arrangement,
both the competent tax authority and the taxpayer may discontinue the negotiations.

Chapter III Formal Application

Article 8

The taxpayer shall, within 3 months after receiving a notice of the competent tax authority stating that formal negotiation about
negotiated pricing arrangement can be carried through, file a formal written application to the competent tax authority for carrying
out the negotiated prices into effect. If the formal written application for negotiated pricing arrangement involving two or more
parties, the taxpayer shall report it to the State Administration of Taxation concurrently. If, due to any of the special reasons
as described below, the taxpayer finds it necessary to delay the submission of a formal written application, it may make a extension
report to the competent tax authority:

1.

where it is really necessary to prepare some materials;

2.

where it is necessary to make technical treatment to the materials, e.g., text translation, etc.;

3.

other non-subjective reasons.

The competent tax authority shall, within 15 days after receiving the report for postponing the submission of a formal written application
for the negotiated pricing arrangement, make a written reply concerning the application. If no reply is made after the time limit
expires, it shall be deemed that the competent tax authority has agreed to the application of the taxpayer for postponing the submission.

Article 9

The formal written application as submitted by the taxpayer to the competent tax authority concerning the negotiated pricing arrangement
should include at least:

1.

the relevant group organization, corporate structure, associated relations, associated dealings, etc.;

2.

the financial and accounting statements of the taxpayer of the recent three years, the materials about the functions of products and
the assets (including intangible assets and tangible assets);

3.

the types of associated dealings and the tax years involved in the negotiated pricing arrangement;

4.

the division of duties, functions, and risks among the associated enterprises;

5.

whether the negotiated pricing arrangement involve two or more parties to a tax treaty;

6.

consideration of the principles for transfer pricing applicable to negotiated pricing arrangement and the methods of computation as
well as the functional analysis and comparability analysis that support the said principles and methods, and the hypothetical conditions
for the transfer pricing principles and computation methods to be adopted;

7.

the statement for the market situation, including the trend of development of the industry concerned and the competition environments;

8.

a prediction of the business operation yields of the negotiated term, and a plan, etc.;

9.

the attitude of relevant associated enterprises towards cooperation, whether they could provide the information about their dealings,
operation arrangement, financial achievements and etc.;

10.

whether double taxation is involved in;

11.

issues related to the laws and tax treaties both at home and abroad, etc.

The aforesaid materials that shall be provided exclude those that have been reported by the taxpayer according to laws and regulations
related to tax collection.

The documents and materials and explanations as mentioned above, including all the documents and materials that can support the pricing
principles and computation methods to be adopted and all the documents and materials that can prove that the conditions for the negotiated
pricing arrangement are met, shall be properly kept by the taxpayer and the competent tax authority.

Chapter IV Examination and Appraisal

Article 10

The competent tax authority shall, within five months as of the day when it receives the formal written application for negotiated
pricing arrangement and the necessary documents and materials submitted by the taxpayer, conduct examination and appraisal and may,
pursuant to the specific situation of examination and appraisal, put forward consultations to the taxpayer or the tax agent thereof
and demand them to supplement relevant materials so as to form a conclusion of examination and appraisal. If it is necessary to prolong
the time for examination and appraisal due to special circumstances, it shall notify the taxpayer in writing timely, and the extension
may not be any longer than 3 months. If the negotiated pricing arrangement involves two or more parties to a tax treaty and it is
necessary to prolong the time period longer than that as prescribed above, it shall be subject to the discussion by both parties.

Article 11

The examination and appraisal conducted by the competent tax authority to the formal written application for negotiated pricing arrangement
shall include at least:

1.

the historical situation of business operations. In the analysis and appraisal of such documents as the operational plans, trend of
development, scope of business, etc. of the taxpayer, the emphasis should be placed on examining the feasibility study report, the
resolution on investment budget (final settlement), the resolutions of the board of directors, etc., and a comprehensive analysis
should be made to reflect relevant information and materials such as finance and accounting statements, auditing reports, etc. The
focus should be laid on the historical and present situations so as to find out the key factors that influence the operation of enterprises
concerned.

2.

the functions and risks. When transactions between the taxpayer and its associated enterprises are analyzed and appraised, attention
should be paid to the respective shares held by the parties concerned at the different stages of goods supply, production, transport,
and sale, etc. and in such aspects as research and development of intangible assets, the functions to be performed, and the risks
to be undertaken at the different stages such as inventory, credit and financing, foreign exchange, market, etc.

3.

information about comparable prices. Analyzing and appraising the information about comparable prices both at home and abroad as provided
by the taxpayer can show the great differences in pricing between independent enterprises and between associated enterprises, and
can help adjust the material differences that affect the dealings. If it is impossible to affirm the rationality of the comparable
dealings or the operation activities, it shall clarify the other documents and materials that the taxpayer has to supplement so as
to prove that the transfer pricing principles and methods of computation that it has adopted have fairly reflected the dealings between
the associated enterprises under examination and the status quo of the business operations as well as that they have been proved
by relevant finance and operation materials.

The competent tax authorities should gather the comparable prices from various sources, including analyzing the data in the export
goods statements that exist in the sub-system of tax refund for the export of goods under the system of “Port Electronic Enforcement
System” of tax refund for the export of goods which is already under its control, and evaluating the rationality of the comparable
dealings or operation activities.

4.

hypothetical conditions. To analyze and appraise all the information and materials as well as the statements as provided by the taxpayer
that can support or prove the negotiated transfer pricing principles and the methods of calculation, one shall analyze their influences
on the profitability of the industry concerned in the macro and micro aspects (e.g., politics, economy, law, technology, etc.), and
analyze their impacts on the taxpayer in such aspects as business strategy, production scale, and the hypothesis of life circle,
etc. so as to determine whether or not they are reasonable.

5.

the principles of transfer pricing and the methods of calculation. One should analyze and appraise whether the transfer pricing principles
and the calculation methods as adopted by the taxpayer in negotiated pricing arrangement are applied to the past, present, and future
dealings between the associated enterprises as well as in the relevant finance and operationmaterials, how they are authentically
applied and whether they accord with the provisions of relevant laws and regulations.

6.

the expected fair dealings prices or profit values. By making further examination and appraisal of the decided comparable prices,
profit plus percentage, the dealings between the comparable enterprises, etc., one could obtain the price or profit value acceptable
to both the tax authority and the taxpayer by means of the suggested transfer pricing principles and methods of calculation so as
to lay the foundation for determining the negotiated pricing arrangement.

Article 12

The competent tax authority shall report the conclusion of examination and appraisal of the negotiated pricing arrangement involving
two or more parties to a tax treaty, level by level, to the State Administration of Taxation for examination and approval.

Chapter V Negotiations

Article 13

The competent tax authority shall, within 30 days as of the day when the examination and appraisal conclusion is formed, conduct further
negotiations with the taxpayer in terms of major issues such as the functions, risks, information about comparable prices, hypothetical
conditions, pricing principles, methods of calculation, the fair dealings value and etc. so as to exchange opinions, come into a
consensus and form a draft of the negotiated pricing arrangement. If the draft involves two or more parties to the negotiated pricing
arrangement, it shall be reported level by level to the State Administration of Taxation for examination and approval.

Article 14

The contents of the draft of negotiated pricing arrangement shall mainly include:

1.

the relevant associated enterprises (basic information of all the enterprises involved in the negotiated pricing arrangement, such
as name and address, etc.);

2.

the associated dealings involved and the time period thereof;

3.

the setup of the relevant articles and the valid term thereof;

4.

the methods of transfer pricing (including the decided comparable prices or dealings, the pricing principles and methods of calculation,
the anticipated scope of outcome of business operation, etc.);

5.

definition of the terms related to the application of the transfer pricing methods and the basis of calculation (e.g., sales volume,
sales costs, gross profits, net profits, etc.);

6.

hypothetical conditions;

7.

the obligations of the taxpayer, including the annual reports, record keeping, the notices of variation of hypothetical conditions,
etc.;

8.

the force adeffect of the arrangement, the confidentiality of the documents and materials, etc.;

9.

clauses about mutual responsibilities;

10.

revision of the arrangement;

11.

the ways and means of dispute resolution;

12.

elimination of double taxation;

13.

points for attention;

14.

date on which the arrangement become effective;

15.

other relevant attachments.

Chapter VI Signing of Arrangement

Article 15

Within 30 days after the competent tax authority and the taxpayer enter into an agreement regarding the content of the draft of the
negotiated pricing arrangement, the legal representatives of both parties or the representatives empowered by the legal representatives
of both parties shall sign the formal negotiated pricing arrangement.

Article 16

The negotiated pricing arrangement shall apply generally only to the business dealings between the associated enterprises during the
2 to 4 years as of the second year when the taxpayer submits a formal application. However, if the year when the taxpayer files a
formal application for negotiated pricing arrangement, the situation of business operation, the types of associated dealings and
the various conditions concerned are coincident with or similar to those as stipulated in the negotiated pricing arrangement to be
signed, they, after the examination and approval of the tax authority in charge, may be retroactively applicable to the year when
the formal application is submitted.

Article 17

The negotiated pricing arrangement may be renewed consecutively, but may not be automatically renewed. The taxpayer should file an
application to the competent tax authority 90 days prior to the expiry of the term of execution of the originally signed negotiated
pricing arrangement, and shall concurrently provide reliable certification materials so as to show that the facts and other environments
as described in the negotiated pricing arrangement that are due have not undergone any substantial change, and that it has been according
with the various clauses and stipulations of the negotiated pricing arrangement. The competent tax authority should, within 60 days
as of the day when it receives the application of the taxpayer for renewing the arrangement, complete the examination, appraisal
and formulation of the draft of negotiated pricing arrangement, and shall complete the renewal with the taxpayer in light of the
time, place and other matters as agreed to by both parties.

Chapter VII Monitoring the Execution

Article 18

The competent tax authority shall monitor the execution of the negotiated pricing arrangement as concluded by it and the taxpayer,
and shall establish relevant system for the monitoring.

Article 19

Within the term of execution of the negotiated pricing arrangement, the taxpayer must well keep the complete set of the documents
and materials relating to the negotiated pricing arrangement (including the account books and other relevant records, etc.), and
may not lose, destroy or transfer any of them. It must, within 4 months after a tax year ends, submit an annual report to the competent
tax authority about the execution of the negotiated pricing arrangement. The annual report shall account for the situation of business
operation during the term of report, and prove that it has observed the clauses of the negotiated pricing arrangement, including
all the matters as required by the negotiated pricing arrangement and whether it is required to revise or substantially cancel the
negotiated pricing arrangement. If there is anything remaining unsolved or to occur, the taxpayer must also make an explanation in
the annual report so as to discuss with the competent tax authority on whether or not to change, alter or terminate the arrangement.

Article 20

During the term of the negotiated pricing arrangement, the competent tax authority shall regularly inspect the execution of the arrangement
by the taxpayer. The inspection should mainly involve: whether the taxpayer has complied with the arrangement and the requirements
therein; whether the materials provided for negotiating and signing the arrangement and the annual report have reflected the actual
operation situation of the taxpayer; whether the materials and methods of calculation on which the transfer pricing methods are based
are correct; whether the hypothetical conditions as described in the arrangement still remain effective; whether the application
of the transfer pricing methods by the taxpayer is in conformity with the hypothetical conditions, etc.

If the taxpayer observes the clauses of the negotiated pricing arrangement and is in conformity with the conditions of the arrangement,
the competent tax authority shall accept the transfer pricing principles and methods of calculation for the associated dealings as
described in the negotiated pricing arrangement. If the taxpayer has been found any ordinary violation of the arrangement, it shall
be punished according to the specific circumstances, even up to canceling the arrangement. If it is found that the taxpayer has disguised
anything or refused to execute the arrangement, the competent tax authority shall terminate the execution of the arrangement retroactively
to the first day of the first year when the negotiated pricing arrangement are carried into effect.

Article 21

During the term of the negotiated pricing arrangement that have been signed and executed, if any of the actual operation outcomes
does not fall within the range of expected prices or profit values of the arrangement, and such violation does not constitute a violation
of the whole clauses of the arrangement and the requirements therein, the competent tax authority shall, after reporting to the superior
competent tax authority for verification, adjust the actual operation outcomes so that they fall within the range of prices or profit
values as determined by the arrangement, and shall make corresponding adjustment to all the parties involved in the relevant associated
dealings with the taxpayer. If the negotiated pricing arrangement involves two or more parties to a tax treaty, it should be reported,
level by level, to the State Administration of Taxation for verification.

Article 22

If, during the term of executing the negotiated pricing arrangement, there occurs any substantial change that may affect the negotiated
prices (e.g., the hypothetical conditions change.), the taxpayer shall, within 15 days after the change takes place, file a written
report to the competent tax authority, making a detailed explanation of the impact of the change to the negotiated pricing arrangement
and attaching relevant materials. The report may be delayed due to non-subjective reasons for not more than 15 days. The competent
tax authority shall, within 30 days as of receiving the written report of the taxpayer, make an examination and appraisal, and deal
with it such as examining the change involved, discussing with the taxpayer about revising the relevant clauses or relevant conditions
of the negotiated pricing arrangement, or taking reasonable remedial measures or suspending the negotiated pricing arrangement according
to the influence of the substantial change on the execution of the negotiated pricing arrangement, and etc. When the execution of
the original negotiated pricing arrangement is suspended, the competent tax authority may, in light of the procedures and requirements
stipulated in the present Rules, renegotiate with the taxpayer about the negotiated pricing arrangement.

Chapter VIII Supplementary Provisions

Article 23

If, during the process of discussion on signing or executing the negotiated pricing arrangement with a taxpayer, the competent tax
authority find it necessary to assort with or jointly discuss about the signing of arrangement with the tax authorities of other
places within the same province or with the tax authorities of other provinces, autonomous regions or municipalities directly under
the Central Government (including the administrations of state taxes and those of local taxes), they shall exchange information and
discuss about assistance pursuant to the following procedures, or jointly cope with the matters according to certain sequences:

1.

If the associated dealing is within a same province, autonomous region, municipality directly under the Central Government, or a city
under separate state planning, the tax authority that has accepted the application of the taxpayer (including the application for
preparatory talks and the formal application) shall directly ask the competent tax authorities of relevant places (including the
administrations of state taxes and those of local taxes) to handle or jointly handle it pursuant to certain sequences upon the approval
of the administration of state taxes or that of local taxes of the province, autonomous region, municipality directly under the Central
Government or city under separate state planning.

2.

If the associated dealing involves two provinces, autonomous regions, municipalities directly under the Central Government, or cities
under separate state planning, the competent tax authority that has accepted the application of the taxpayer (including the application
for preparatory talks and the formal application) shall fill in a Liaison Note for Negotiated Pricing Arrangement, and report it
to the administration of state taxes at the provincial level or that of local taxes of the same province, autonomous region, municipality
directly under the Central Government, or city under separate state planning so that the latter could contact the administration
of state taxes or that of local taxes of the other relevant province, autonomous region, municipality directly under the Central
Government, or city under separate state planning for handling. The administration of state taxes and that of local taxes of the
other province, autonomous region, municipality directly under the Central Government, or city under separate state planning shall,
within 15 days as of receiving the Liaison Note, study relevant information, materials, ways of assistance and the possibility of
joint handling, and shall give an written reply.

3.

If any of the following circumstances occurs to the discussion on signing or executing the negotiated pricing arrangement, it shall
be reported in writing, level by level, to the State Administration of Taxation which is responsible for coordinating, supervising
or directly handling the matter. The State Administration of Taxation