Businesses in China should comply with its latest transfer pricing documentation requirements to avoid penalties for non-compliance.
Overview
Businesses in China should comply with its latest transfer pricing documentation requirements to avoid penalties for non-compliance. Compared with the previous regime, key changes include:
- Annual Related Party Transactions Reporting Forms (the “New Forms”) replace the previous nine forms and increase the total number of forms from nine to 22. More detailed and transparent information disclosure is required. The New Forms also include the Country-by-Country reporting form (“CbC Form”).
- Bulletin on Improvements to Reporting of Related-party Transactions and Administration of Contemporaneous Documentation (SAT Bulletin [2016] No. 42 or “Bulletin 42”) introduces a three-layer documentation approach, including master, local, and special issue files, compared with the old transfer pricing regime that did not involve the master and special issue files. In addition, the local file must now include a value chain analysis as well as location-specific advantages (“LSAs”).
Conditions that require preparation of a master file
An enterprise is required to prepare a master file for a fiscal year in Chinese if it meets any of the following thresholds:
- When the enterprise has cross-border related party transactions and its group has prepared a master file; or
- Related party transactions totalling over RMB1 billion during the year
Conditions that require preparation of a local file
An enterprise is required to prepare a local file for a fiscal year in Chinese if it meets any of the following thresholds:
- Transfer of over RMB200 million (for toll manufacturing, the amount in customs records for imports and exports should be included) in tangible assets;
- Transfer of over RMB100 million in financial assets;
- Transfer of over RMB100 million in intangible assets;
- Other related party transactions totalling over RMB40 million; or
- An enterprise that engages in simple manufacturing activities such as toll processing, contract manufacturing, simple distribution or contract R&D and incurs a loss is required to prepare a local file regardless of whether it reaches any of the thresholds listed above*.
*The last condition was not stated in Bulletin 42. Instead, it was specified in Bulletin of the State Administration of Taxation on Promulgation of the Administrative Regulation for Special Tax Audit Adjustment and Mutual Agreement Procedures (“Bulletin 6”).
Conditions that require preparation of a special issue file
An enterprise is required to prepare a special issue file in Chinese if it meets any of the following thresholds:
- The related party debt-to-equity ratio exceeds 2:1 for non-financial enterprises or 5:1 for financial enterprises; or
- Enterprise engaged in a cost-sharing agreement
Other considerations for documentation
Exemption
Enterprises that have only conducted related party transactions with domestic related party companies, or implemented an Advance Pricing Arrangement (APA), are exempt from preparing master, local and special issue files.
Deadline for preparation
The master file shall be prepared within 12 months after the date when the group’s ultimate holding company’s fiscal year ends.
The local and special issue files shall be prepared before June 30 of the year following the year when the related party transaction occurred.
Deadline for submission
Contemporaneous documentation shall be provided within 30 days of the tax authority’s request.
Content of master file | Content of local file |
Bulletin 42 states that the master file must disclose key global business information of the whole group to which the Chinese enterprise belongs, including the group’s organisational structure, the group’s business description (including intercompany transactions), intangibles, financing activities, as well as financial and tax status.
Organisational structure Group’s business description Intangibles Financing activities Financial and tax status |
Bulletin 42 states that the local file should provide an overview of the Chinese enterprise, detailed information of its related party relationships and transactions, information on the selection and application of transfer pricing methods, as well as a comparability analysis.
Overview of Chinese enterprise Related party relationships Related party transactions Selection and application of transfer pricing methods Comparability analysis |
Talk to our experts:
Chan Weng Keen
Partner and Industry Lead, China Practice
T +65 6594 7864
[email protected]
Ng Thiam Soon
Partner and Deputy Industry Lead, China Practice
T +65 6594 7809
[email protected]