New transfer pricing rules in China were introduced in January last year through Guoshuifa (2009) No. 2. For transactions in 2008, the deadline for completing contemporaneous documentation was December 31, 2009. Contemporaneous documentation for the year 2009 and onwards should be completed by May 31 subsequent to the year during which the related-party transactions took place.
With the deadline for the completion of documentation for 2008 transactions now past, expect the tax people to start asking for them. The deadline to document 2009 transactions is also now just two months away. Do you know what exactly is required?
Not all companies actually need to file. In general, contemporaneous documentation should be prepared by taxpayers with aggregate related-party transactions of:
- RMB 200 million or above of purchase and/or sale transactions, or
- RMB 40 million or above of other kinds of transactions such as intangibles, services and interest from financing transactions
With the December 31 deadline having passed, Chinese tax authorities are now actively collecting documentation from taxpayers. But tax authorities in different parts of China have been taking different approaches.
The larger tax authorities such as Beijing, Shanghai, Shenzhen, Zhejiang and Jiangsu have indicated that they will ask for the submission of 2008 transfer pricing documentation from companies in targeted industries and also focus on large multinational companies with significant related-party transactions.
On 13 January 2010, the Shenzhen State Tax Bureau issued a notice on transfer-price administration that instructed subordinate district tax bureaus to collect 2008 transfer pricing documentation from certain companies identified in a list. The enterprises on the list had total revenues in excess of RMB100 million.
They were to be required to submit 2008 transfer pricing documentation to the relevant tax bureau by March 20, 2010. As for the contemporaneous documentation for 2009 and onwards, the deadline for submission will be June 20 the following year.
In contrast, tax authorities in Tianjin, Shandong and Guangzhou are not going to pick and choose. They issued notices on collection of transfer pricing documentation stating that they will collect all transfer-pricing documentation from all companies required to prepare contemporaneous documentation.
The Guangzhou tax authority also confirmed that it would apply notice Guoshuihan (2009) No. 363 to the 2008 year. Transfer pricing documentation for that year should have been submitted by December 31, 2009. Guoshuihan (2009) No. 363 was issued by the State Administration of Taxation on July 6, 2009.
The Guangzhou tax authority intends to place under strict scrutiny companies with cross-border transactions that were established by multinational company groups, including those engaged in single manufacturing, distribution and contract research and development services with limited function and risks.
Regardless of whether the relevant transactions thresholds are met, all loss-making companies are required to prepare transfer pricing documentation for the year they are in loss. For the year 2009, loss-making companies are required to submit the transfer pricing documentation by June 20, 2010.
The release of the notices underlines the Chinese tax authorities’ determination to tighten transfer pricing compliance enforcement. If companies have not prepared the transfer pricing documentation for 2008 per Guoshuifa (2009) No. 2, we highly recommend them to complete it as soon as possible.
Any non-compliance with the Chinese transfer pricing regulations would result in penalties, adjustment of taxable income, penalty interest and increased scrutiny from the tax authorities.
About the Author
Catherine Tse is Senior Manager – Tax Services at accounting firm Mazars. Before joining the company in 2009, she spent two years with Ernst & Young Shanghai focusing on various transfer pricing engagements. She is an associate member of the Institute of Chartered Accountants in Australia and is a fellow of the Hong Kong Institute of Certified Public Accountants.