Beginning of a new era – SAT issues new China transfer pricing compliance requirements

Jul 2016, Issue 21

Beginning of a new era – SAT issues new China transfer pricing compliance requirements

On 29 June 2016, the State Administration of Taxation (SAT) issued the Public Notice Regarding Refining the Reporting of Related Party Transactions and Administration of Transfer Pricing Documentation (SAT Public Notice [2016] No. 42, hereinafter referred to as the “Public Notice 42”). The Public Notice 42 provides new transfer pricing compliance requirements in China, including Annual Reporting Forms for Related Party Transaction (RPT Forms), Country-by-Country Reporting (CbCR), and Transfer Pricing Documentation (TPD), all of which are substantial changes to the existing rules.

Public Notice 42 replaces the provisions on related party reporting and transfer pricing documentation in the previous Guo Shui Fa [2009] No. 2, Implementation Measures of Special Tax Adjustment (Trial) (hereinafter referred as “Circular 2”) and Annual Reporting Forms for Related-Party Dealings of Enterprises of the People Republic of China (Guo Shui Fa [2008] No. 114).

The number of RPT Forms has increased to 22 tables (from 9 tables), including the CbCR, while the TPD requirement has adopted a three-tiered approach, including master file, local file and special issue file. Taxpayers still need to submit the RPT Forms together with the annual income tax filing. The local file / special issue file of TPDs should be completed by 30 June 2017 for related party transactions during the 2016 fiscal year (i.e. 1 January 2016 to 31 December 2016), while the master file should be completed within 12 months after the close of the same fiscal year of the group’s ultimate holding company. Taxpayers should submit TPD within 30 days upon the tax authorities’ request.

We suggest every taxpayer take the following actions as soon as possible:

  • assess and revisit their related party transactions under the new TPD thresholds;
  • identify the gap between the existing TPD report and the new TPD requirements and start to prepare the additional documentation and disclosure to bridge the gap;
  • create and operate a consistent and coordinated approach to prepare group TPD reports; and
  • collect data and conduct a trial run if necessary for the new RPT Forms.

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