|
On 5 December 2008, China's State Administration of Taxation ("SAT") approved and circulated the final template of "Annual Reporting Forms for Related-Party Transactions" (the "RPT Reporting Forms") under a circular entitled Guo Shui Fa [2008] No.114. On 17 February 2009, the SAT issued another circular - Guo Shui Han [2009] No.72 ("Circular 72") - that contains the "Implementation Requirements on Annual Reporting Forms for Related-Party Transactions". This circular aims to offer further guidance on the RPT Reporting Forms in the following areas:
- Defining and explaining the correlation between the RPT Reporting Forms and the Annual Corporate Income Tax Return, as well as the connectivity and interaction between the various RPT Reporting Forms; and
- Setting out detailed explanatory notes on how to complete the RPT Reporting Forms and how the tax authorities will utilize the data for analysis and assessment purposes.
Example: With respect to the Financing Form (i.e., Form 7), Circular 72 specifies that intercompany financing arrangements through third-party banks (i.e., "entrusted loans" between related parties) or third party loans guaranteed by related parties with joint and several liability should be disclosed as related party transactions on the RPT Reporting Forms and therefore fall under the SAT's scrutiny.
Observations
Over the past three months, the SAT has released a series of tax circulars relating to transfer pricing administration. The issuance of Circular 72 indicates that the SAT will establish high standards for the local tax authorities at the provincial (or equivalent) levels in terms of administration and review of the RPT Reporting Forms. In addition, we expect that the SAT will intensify the update and maintenance of its national electronic database, which will facilitate future exchanges of information among different tax authorities throughout China for purposes of tax collection, administration, and investigation.
Circular 72 provides detailed explanations on how to prepare the RPT Reporting Forms, and we understand that - to some extent - the online and electronic filing system of the RPT Reporting Forms will become more user-friendly for taxpayers. The Chinese tax authorities will rely on the information disclosed on the RPT Reporting Forms to analyze the reasonableness of related party transactions and to select potential transfer pricing audit targets. As such, taxpayers - especially those multinational enterprises with a significant presence in China - should complete the RPT Reporting Forms carefully and should ensure that the information disclosed is consistent with their contemporaneous transfer pricing documentation (if required) as well as with the information filed by their related parties in China. |
