How familiar are you with Record to Report (R2R))? It's’ a financing and Accounting (F&A)...
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.
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.
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.
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 (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.
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:
Henceforth, the discussions pertaining to reporting & disclosure requirements of Chinese Local Files must be completed by June, 30.
Chinese Taxpayers & entities must disclose transfer pricing information to be filed with Taxation returns on RPT Forms by 31st May every year. Amongst the information required on Form G112000 is the related party’s effective tax rate originally.
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.
Also, Read: What is Transfer Pricing in India.