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on Friday, 02 December 2016
in Business in China

China's New Transfer Pricing Rules

Written by Zachi Lichtblau at Bonnard Lawson International Law Firm

On the 13th of July 2016 China's State Administration of Taxation (‘SAT’) released Bulletin 42 that contains the new transfer pricing documentation rules. Since it will have a far-reaching impact on taxpayers, it is of great importance to be aware of the content and effects of these (partly) new rules. In principle, all multinational companies engaged in cross-border, related-party transaction can expect to be significantly affected by the transfer pricing documentation requirements in Bulletin 42. An exception has been made for multinational companies that are engaged in purely domestic related-party transactions.

 Bulletin 42 requires the taxpayer as described above to provide three-layer transfer pricing documentation: a master file containing general information about the multinational company group’s global business operations, a local file containing detailed information about the related-party transactions of the Chinese enterprise in the group and a country-by-country report (CbC Report) containing information about the global allocation of the multinational company group’s income and taxes. Besides that, the taxpayer is required to prepare a special file for cost sharing agreements and thin-capitalisation.

The master file has to be prepared within 12 months from when the fiscal year ends for the multinational companies group’s ultimate holding company if the enterprise’s total related-party transactions exceed RMB1 billion or the group has already prepared a master file. The master file provides a blueprint of the group and contains for example the group’s organizational chart, a description of the company’s business and financial arrangements and documents containing the financial and tax positions. The required information for this file is basically the same as under the BEPS proposals.

The local file for the annual related-party transactions has to be prepared before the 30th of June of the following year. Although most of the information required for this file has already been required under Circular 2, Bulletin 42 does require some new information, for example information regarding location specific advantages.

The CbC Report must be submitted when the enterprise files its annual tax return. It requires aggregate country-by-country data about entities in every country, including information about revenue, profits before income tax, income tax payed etc. In case the CbC Report is not mandatory, the PRC tax authorities may request to submit such a report nevertheless if the group to which the audited enterprise belongs is required to prepare a CbC Report under any jurisdiction’s law and the PRC tax authorities cannot obtain that report through an information exchange program.

Although the term ‘special file’ is new, the required information was already required under Circular 2. The new terminology will not have any substantial impact.

With more transfer pricing documentation information being required under Bulletin 42, multinational companies need to exercise care in reevaluating transactions, preparing action plans, establishing time tables and identifying and bridging the gaps. By doing so, they safeguard their tax interests in China.

On the 13th of July 2016 China's State Administration of Taxation (‘SAT’) released Bulletin 42 that contains the new transfer pricing documentation rules. Since it will have a far-reaching impact on taxpayers, it is of great importance to be aware of the content and effects of these (partly) new rules. In principle, all multinational companies engaged in cross-border, related-party transaction can expect to be significantly affected by the transfer pricing documentation requirements in Bulletin 42. An exception has been made for multinational companies that are engaged in purely domestic related-party transactions.

Bulletin 42 requires the taxpayer as described above to provide three-layer transfer pricing documentation: a master file containing general information about the multinational company group’s global business operations, a local file containing detailed information about the related-party transactions of the Chinese enterprise in the group and a country-by-country report (CbC Report) containing information about the global allocation of the multinational company group’s income and taxes. Besides that, the taxpayer is required to prepare a special file for cost sharing agreements and thin-capitalisation.

The master file has to be prepared within 12 months from when the fiscal year ends for the multinational companies group’s ultimate holding company if the enterprise’s total related-party transactions exceed RMB1 billion or the group has already prepared a master file. The master file provides a blueprint of the group and contains for example the group’s organizational chart, a description of the company’s business and financial arrangements and documents containing the financial and tax positions. The required information for this file is basically the same as under the BEPS proposals.

The local file for the annual related-party transactions has to be prepared before the 30th of June of the following year. Although most of the information required for this file has already been required under Circular 2, Bulletin 42 does require some new information, for example information regarding location specific advantages.

The CbC Report must be submitted when the enterprise files its annual tax return. It requires aggregate country-by-country data about entities in every country, including information about revenue, profits before income tax, income tax payed etc. In case the CbC Report is not mandatory, the PRC tax authorities may request to submit such a report nevertheless if the group to which the audited enterprise belongs is required to prepare a CbC Report under any jurisdiction’s law and the PRC tax authorities cannot obtain that report through an information exchange program.

Although the term ‘special file’ is new, the required information was already required under Circular 2. The new terminology will not have any substantial impact.

With more transfer pricing documentation information being required under Bulletin 42, multinational companies need to exercise care in reevaluating transactions, preparing action plans, establishing time tables and identifying and bridging the gaps. By doing so, they safeguard their tax interests in China.

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