China Transfer Pricing Regulation Review

Since June 2016, China’s State Administration of Taxation (SAT) has responded to the OECD BEPS transfer pricing recommendations through release of two primary regulatory documents, to include Announcement [2016] #42, Improved Administration of Related Party Declarations and Contemporaneous Documentation, and Announcement [2017] #6, Administrative Measures on Special Tax Investigation, Adjustment and Mutual Agreement Procedures. While in some cases Announcement 42 increases the complexity of related party transaction reporting by global companies operating in China, many of the provisions clarify points that were previously quite vague, and overall the regulations mostly bring China’s transfer pricing documentation requirements into line with the BEPS recommendations. Meanwhile, Announcement 6 consolidates a number of previously released regulations related to outbound payments for royalties or service fees, and introduces many of the BEPS concepts into the regulations. The scope of the announcement includes transfer pricing, thin capitalization, controlled foreign companies (CFCs) and general anti-avoidance rules (GAAR), while also detailing the rationale and methods used in transfer pricing audits and tax investigations. A brief summary of key points in the regulations follows.

Related Party Transactions Clarified

Announcement 42 provisions mandate that all resident and non-resident companies subject to China corporate taxation annually file an updated version of a Report of Yearly Related Party Business Transactions. Correspondingly the definitions of related party relationships and transactions have been clarified and broadened, thereby making it simpler to determine whether or not a related party relationship exists.

Related party transaction definitions include a new category covering financial assets transfers. The financial intermediation category has expanded to include long term and short-term borrowing, surety bonds, accrued interest advances, deferred payables and receivables, and similar transactions. The related party service transaction category has been expanded to include market survey, marketing planning, agency, design, consultancy, administration, technical services, contract R&D, repair and maintenance, legal services, financial management, audit, recruitment, training, centralized procurement and so on.

Contemporaneous Documentation and Country-by Country Reporting

Announcement 42 also details new contemporaneous documentation requirements, to include how the documentation is structured, the contents of the documentation, the thresholds at which documentation is required, and the deadlines for document preparation. As per the BEPS Action 13 report, contemporaneous documentation shall now include a Master File and a Local File, as well as “special documentation” that may be required with respect to Cost Sharing Arrangements, or where thin capitalization thresholds are exceeded.

Additionally, there are now three general cases in which country-by-country (CBC) reporting is required. In the first case, a resident ultimate holding company of a multinational group that has consolidated financial statements exceeding RMB 5.5 billion for the previous year must file aCBCreport. ACBCreport will be required where a multinational group designates a China resident company such responsibility. Lastly, where any taxpaying entity in China is under special tax investigation, CBC reporting is required even if the entity does not fall into either of the two cases listed above.

Special Tax Investigations

Announcement 6 clearly specifies factors that may trigger special tax investigations, to include companies that: engage in a large number and/or varied types of related party transactions; incur long-term losses or low profits; have transactions with related parties in low tax jurisdictions; fail to prepare contemporaneous documentation as required; exceed standards for debt to equity ratio; have certain characteristics related to CFCs; or have tax planning arrangements that have no reasonable business purpose.

Transfer Pricing Methods

Announcement 6 allows that in any comparability analysis, any of the OECD acceptable transfer pricing methods may be used, as well as other arm’s length methods which reflect the principle that “the place where profit and economic activities occur matches the place of value creation.” Each of the methods is described in detail with respect to when a given method should be used, the factors that should be considered in choosing, and how
prices shall be calculated.

Royalties and Service Fees between Related Parties Announcement 6 mandates that any royalties or licensing fees paid to related parties must be commensurate with provable economic benefits to the party paying the fees. Likewise, service transactions between related parties must be beneficial, willingly received by the recipient, and priced at arm’s length. A list of services considered non-beneficial to the recipient is included in the announcement. If determined to have no economic benefit to the recipient, deductibility of royalties and/or service fees is not allowed.


While remaining questions linger, the SAT announcements introduced above go a long way toward providing unambiguous regulatory guidance with respect to transfer pricing and related issues for both taxpayers and in-charge tax officials throughout China. As a result, it is predicted that tax investigation and adjustment practices in transfer pricing cases will be increasingly standardized from one tax bureau to the next. Likewise
the reasonably close adherence to the related BEPS deliverables should help global businesses better understand how to plan and implement transfer pricing policies and practices, as well as what is required to avoid special tax adjustment investigations in most types of related party transactions.

Flora Lou and Scott Heidecke, Nexia TS Shanghai Co. Ltd,