Global Transfer Pricing in China: An Overview

Narendra Kumar

02 Nov, 2019

• It is also known as the Transfer Cost. It is the cost at which the separate divisions or departments of a Company transact with each – other.

EG: Trade of supplies or labor between departments.

Therefore, when Divisions are required to transact with one another, a transfer price is used to determine costs. Transfer prices tend not to differ much from the price in the market because one of the entities in such a transaction loses out; they start either buying for more than the prevailing market price or selling below the market price, and this affects their performance. Mainland China has been a key player in the development of the United Nations Transfer Pricing Guidelines for Developing Countries, as well as the Organization of Economic Cooperation and Development (“OECD”) initiative and action plan on Base Erosion and Profit Shifting (“BEPS”).

Regulations on the same ensure fairness & integrity in transfer pricing models amongst entities. Therefore, these costs are closely scrutinized in order to book profits within the given arm’s length pricing methods & disbursal of appropriate taxes as well.

What is the usage in general parlance?

• Transfer pricing on a multinational level has tax advantages, but regulatory authorities frown upon using transfer pricing for tax avoidance. When transfer pricing has to be done, companies can book profits of Goods and Services Tax in a different country that may have a lower tax rate
• The International Taxation laws are regulated by the Organization for Economic Cooperation and Development (OECD), and auditing firms within each international location audit financial statements accordingly.

Chinese Scenario

• China’s State Administration of Taxation (SAT) is the authority that updates China’s transfer pricing compliance requirements. It keeps a check on the foreign headquarters of Multinational groups operating in China. Certain Disclosures are extra-territorial in nature, including copies of related party financial statements (RPT) and allocations of profits across the value chain. In addition to the local file, China has also adopted the other elements of the New Global Transfer Pricing documentation environment i.e.
• The Master file;&
• The country-by-country report (CBCR) requirements

What are the Master Filing Requirements?

OECD guidelines are observed in an inherent manner while filing for master reporting guidelines. Generally, the master File is prepared by the group’s headquarters, providing an overview of the group’s operations and transfer pricing policies, and then applicability & execution by all of the members of the group multination ally for the members to incorporate in their contemporaneous documentation deals for filing & reporting purposes.

–  They are required to maintain the master file in Chinese if the entities Related Party Transactions crosses RMB 1 billion.

• Details as to what types of corporate restructurings need to be disclosed, including any transfers of functions, risks or assets within the group, as well as changes in business legal forms, share acquisitions, asset acquisitions, mergers or spin-offs or any other strategic alliances kicked off.
  
• Information regarding Bilateral Advance pricing requirements to be disclosed & thereafter executed.
• Maintenance of high-level assessment policy for the master files to completely comply with its origin.

Henceforth, Chinese subsidiary/associates must have a copy of the group’s Master File within 12 months of the ultimate parent company’s fiscal year-end date.

Country By Country Reporting Requirements

CBCR reporting requirements are a high-profile result of the base erosion and profit shifting (BEPS) project lead by the Organization for Economic Cooperation and Development (OECD), falling under BEPS. China has joined many other tax jurisdictions around the world in implementing CBCR^[1] (Cross-Border Cooperation and Reconciliation) and has done in a manner fully in alignment with OECD recommendations and guidelines.

–China-based multinational headquarters with income in excess of 5.5 RMB must file a CBCR Report with an Annual tax return by the end of May.

• The information required is included in the Master File.

Local Filing

Requirements for a Local file are rather extensive in reach than OECD guidelines. They have an extraterritorial reach. A Chinese subsidiary must file a local file if the RPT during the year meets the following criteria:

• Annual Related Party Transactions involving physical goods exceed RMB 200 million.
• Annual Related Party Transactions involving the transfer of financial assets or rights to intangibles exceed RMB 100 million.
  
• Annual Related Party Transactions of other types (e.g., related party service transaction, royalties for use of intangibles, related-party financing transactions) in the aggregate exceed RMB 40 million.
  

Henceforth, the discussions pertaining to reporting & disclosure requirements of Chinese Local Files must be completed by June, 30.

Related Party Transaction Form Filing

Chinese Taxpayers & entities must disclose transfer pricing information to be filed with Taxation returns on RPT Forms by 31^st May every year. Amongst the information required on Form G112000 is the related party’s effective tax rate^[2] originally.

Conclusion

Due to the rapidly globalizing economy and increasing complexity in business models, tax authorities around the world are actively protecting their revenue base through the introduction of transfer pricing regimes, which focus on the taxation of profits that stem or ooze out from related party transactions. These transfer pricing regimens will typically provide guidance to taxpayers on how related party transactions should be priced and how taxpayers can discharge the burden of proof from their transfer pricing arrangements comply with the arm’s length standard pricing employed.

It is understood that the SAT will be entering the information from the RPT Forms into a massive database and using “big data” approaches to identify possible audit targets. Amongst the other situations, the SAT will be looking for potential “profit shifts” through high volume transactions with related parties in low tax jurisdictions.