China Introduces Wide-Sweeping New Transfer Pricing Rules

By Dezan Shira & Associates

Posted: 29th July 2016 08:25

On June 29, China’s State Administration of Taxation (SAT) issued the “Announcement on the Administration of Related-party Transactions and Contemporaneous Documentation (SAT Announcement [2016] No. 42)”, which introduces a three-tiered documentation framework that will replace its current transfer pricing documentation rules.

The Announcement was released following the opinion-seeking draft publicized by the tax bureau in September 2015, and is largely consistent with the BEPS (Base Erosion and Profit Shifting) project launched by the Organization for Economic Cooperation and Development (OECD). Compared to the 2015 Draft – which has been discussed in our previous article – the Announcement revised some terms and further clarified the requirements for reporting companies, as well as the information they need to submit. Below, we provide a brief summary of the key information taken from the Announcement, and offer suggestions for multinational companies seeking to repatriate their profits from China to their headquarters.

Related-Party Transaction Reporting

China’s Corporate Income Tax Law and the Law on the Administration of Tax Collection stipulates that, in cases of related-party transactions, both Chinese resident enterprises who have sound accounting systems and non-resident enterprises operating and paying income taxes in China must make a joint declaration of their business activities when filing the annual income tax declaration form to China’s tax authorities.

According to the new transfer pricing regulations, the number of related-party filing forms has been increased from nine to 22, including information disclosures with respect to the Country-by-Country (CBC) Report. The filing report needs to contain the following:
Additionally, the CBC Report form needs to be filed in accordance with the information disclosure requirement stipulated by Action 13 of BEPS. CBC Reports are required for the following taxpayers, who must submit them in both English and Chinese:

Contemporaneous Documentation

Enterprises are required to finish preparing their contemporaneous documentation before May 31 of the following year, and must submit documentation within 20 days of a request being made by the tax authorities. Please note that all documentation needs to be prepared in Chinese and sealed and signed by the company’s legal representative. Given that the deadline is earlier than the BEPS recommendation of December 31, the draft allows Chinese filers to apply for an extension.

The regulations’ three-tiered framework for contemporaneous documentation consists of master files, local files, and special files:
Enterprises which have entered an advance pricing arrangement (“APA”) do not need to prepare local or special files, and the related party transaction amount covered in the APA is not included in the related party transaction amount.

Extra Considerations for Local Files

There are a number of other pieces of information that must be disclosed as part of the local file, the most important being:

Looking Forward

The new regulations form a part of China’s movement towards a harsher business environment, and also the implementation of stricter supervision on intercompany/related-party transactions. The promulgation of Announcement No.42 further clarifies the importance of related party filing and contemporaneous documentation. The instructions in the Announcement provide more comprehensive and systematic rules in the anti-tax avoidance work of China’s tax authorities. The new, more detailed regulations will greatly increase the compliance workload of enterprises, and will pose new demands and challenges for taxpayers.
Considering the changes discussed above, we suggest that taxpayers take the following measures as soon as possible:
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.
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