Transfer Pricing guide: China

Is the jurisdiction part of OECD/G20 Inclusive Framework on BEPS?

China is not an OECD member jurisdiction. However, there were domestic regulations echoing certain topic/discussion on the OECD/G20 Framework on BEPS.

Relevant Transfer Pricing regulation

SAT Annoucement 2016 No. 42

Is this regulation aligned with the OECD Guidelines

State Administration of Taxation (SAT) issued Announcement on the Enhancement of the Reporting of Related Party Transactions and Administration of Contemporaneous Documentation ("Announcement 42") in June 2016 (made available to public in July 2016). Announcement 42 integrates, into Chinese tax regulations, the OECD/G20 BEPS Action 13 Report recommendations on transfer pricing documentation (i.e. the Master File and the Local File).

Documentation Threshold for Preparation of Local File/ TP Documentation

Companies are required to prepare the Local File if meeting any one of the following thresholds:
- Transfers of tangible assets exceed RMB 200 million (for processing/toll manufacturing, the customs declared value of imports and exports for the year should be included);
- Transfers of financial assets exceed RMB 100 million;
- Transfers in ownership of intangible assets exceed RMB 100 million; or
- All other transactions, including services, royalites (licensing transactions), interest on financing transactions etc. exceed RMB 40 million.

Documentation Threshold for Preparation of Master File

Companies that are required to prepare the Master File include:
- A company with cross-border related party transactions and the MNE, to which the company’s ultimate holding company belongs, has already prepared a Master File; or
- A company with related party transactions exceeding RMB 1 billion.

Documentation Threshold for Preparation of Country by Country Report

There are two circumstances in which the CBC Report needs to be prepared and submitted by a Chinese taxpayers when it submits the related party transaction forms (part of its annual tax return):
- The taxpayer is the ultimate holding company of a multinational enterprise (“MNE”) and the annual consolidated revenue of the group in the previous fiscal year exceeds CNY 5.5 billion; or
- The company has been designated by the group to submit the CBC Report.

Submission of Local File, Master File, and CbC Report Required? If so, when?

Deadline: Master File must be prepared within 12 months of the year end of the ultimate holding company. Local File and Special File shall be prepared by 30 June following the tax year in question (e.g. 30 June 2025 for y/e 31 Dec 2024).

If No Submission Required, any Other Deadline?

Contemporaneous documentation shall be in Chinese and shall be submitted to tax authorities within 30 (natural) days of request.

Other Documentation Requirements

Special File must be prepared without regard to thresholds for companies with CSAs and companies exceeding the related-party thin capitalisation debt-equity threshold (5-to-1 for financial institutions and 2-to-1 for all other enterprises).
Special File must be prepared without regard to thresholds for companies with CSAs and companies exceeding the related-party thin capitalisation debt-equity threshold (5-to-1 for financial institutions and 2-to-1 for all other enterprises).

Does TP documentation / Local file Need to be Prepared Contemporaneously with Tax Return Filing (i.e., before filing the return)?

Yes, for penalty avoidance purposes, a taxpayer is considered to have satisfied the documentation requirement if it maintained certain documentation for each year.

Preparation of TP Return Required?

Yes, called related party transaction disclosure forms.

Deadline for TP Return Filing

30th May of the subsequent year.

Key information to be included in the TP Return

Related Party transaction details, pricing policy, background information of related parties involved.

Local vs Regional Comparables Set

Local set is preferred and also can accept a Asian regional set.

Single-Year vs Multi-Year Analysis

Multi-year, usually three years weighted average PLI is preferred.

Public vs Private Comparables

Public will be preferred.

Interquartile Range or Full Range

Interquartile range is preferred.

Transaction-Based or Aggregate Approach, or Both

Testing on an aggregate basis is acceptable, whilst it is best to apply transaction-based approach for more specific transaction.

How Often are Benchmarking Sets Renewed (financial update versus full scope BMS preparation)

Normally be renewed on an annual basis and updated the result in the TP local file.

In Case of Delayed Submission of Documentation

One-off penalty for CNY 2,000 - 10,000.

In case of Income Adjustments in Course of a Tax audit

An extra 5% interest penalty will be levied on top of the LPR rate in a TP audit.

APA & MAP Availability

Taxpayers may request unilateral, bilateral or multilateral APAs. The APA process is reviewed by the provincial level authority and finalized by the national SAT.

Applicability of Safe Harbour Rules

Not applicable to China.

Critical Transfer Pricing Issues Prevailing in the Jurisdiction, if any

Cross border service recharges, cost allocation, royalty fee, etc.

Criteria/ Guidelines for Transfer Pricing Audit/ Assessments by Tax Authority

Taxpayers with the below characters will be selected as potential TP audit target in China:

• Large volume of related party transaction or with diversified transaction types:

• Consecutive years' loss-making or low profit;

• Profit margin significantly lower than peer entities;

• Incur transactions with counter-parties in tax heaven;

• Did not file the TP documentation compliance requirement.

Relevant Regulations and Rulings with Respect to Thin Capitalisation or Debt Capacity in the Jurisdiction

Caishui 2008 No. 121, Article 46 of China CIT law are the major guideline on thin-capitalisation. The safe harbour ratio is 2:1 for non-financial institutions and 5:1 for financial institution.