Friday, 19 August 2016

China introduces CbC reporting and master file/local file requirements

On 29 June 2016, China’s State Administration of Taxation (SAT) issued rules (Bulletin 42) that introduce new transfer pricing reporting and documentation requirements. The rules, which generally are in alignment with the three-tiered framework for transfer pricing documentation found in the final report on action 13 of the OECD BEPS project, are designed to improve the reporting of related party transactions and contemporaneous documentation. Bulletin 42 applies retroactively as from 1 January 2016.
Notably, while Bulletin 42 generally adopts the OECD approach, it also requires a technical analysis and consideration of positions that are familiar to the China market. Requirements that were signaled in the September 2015 discussion draft revisions to Circular 2 (the main framework for China’s transfer pricing and anti-abuse rules), including countryby-country (CbC) reporting, the master and local files, the special issue file and value chain analysis, also are covered in Bulletin 42. A special issue file will need to be prepared for cost sharing arrangements (CSAs) and in certain thin capitalization cases.
Circular 2 covers areas such as transfer pricing adjustments, CSAs, controlled foreign companies, thin capitalization and the general anti-avoidance rule. Bulletin 42, however, addresses only the reporting of related party transactions and the preparation of contemporaneous documentation; it replaces the transfer pricing documentation rules in Circular 2 (chapters 2 and 3, and articles 74 and 89) and repeals other related guidance (Circular 114). The SAT will be issuing additional rules to complete the planned overhaul of Circular 2.
Bulletin 42 covers issues that have been the focus of the Chinese tax authorities for a number of years, addressing practical issues they have encountered and laying a new landscape for transfer pricing practice and management in China. Additionally, the implementation of BEPS action 13 represents a dramatic shift in China’s policies and is a milestone in the “internationalization” of the country’s transfer pricing practices.

Source & more info: Deloitte