Transfer Pricing
Country Summary

This document summarizes the transfer pricing requirements and regulations in China. China, although not an OECD member, has integrated elements of the OECD Guidelines into its transfer pricing legislative framework. It mandates the submission of transfer pricing documentation consistent with OECD Guidelines, including master files, local files, and country-by-country reports.


China’s Transfer Pricing Framework

Influence of OECD Guidelines

China, while not an OECD member, has incorporated transfer pricing documentation requirements influenced by the OECD Guidelines. These regulations mandate the submission of a master file, local file, and country-by-country reporting, aligning with international standards.

Laws & Regulations

China’s Key Documents

China’s transfer pricing legislation is primarily defined in several documents issued by the China State Administration of Taxation. These documents include “Implementation Measures of Special Tax Adjustments” (Guoshuifa [2009] No. 02), “Notice 42,” “Notice 64,” “Notice 6,” and “Notice 46.”

Defining Related Parties

Identifying Related Party Relationships

The document elaborates on what constitutes a related party relationship in China, based on share ownership, debt relationships, control over business operations, director appointments, and other factors. It clarifies how these relationships should be recognized and mentions exceptions for shareholdings by the state.

Influences & APA

Nature of Transfer Pricing Documentation

China’s transfer pricing framework has been significantly shaped by the OECD Guidelines, even though the connection is not explicitly stated. China also contributed to the UN TP Practice Manual, highlighting its transfer pricing practices in the UN TP Practice Manual 2021.

Advance Pricing Agreements (APAs)

The document outlines the APA application requirements, processes, and considerations, with specific attention to value chain analysis and the conditions for applying for an APA in China.

Audit Practices & Risks

Factors Triggering Audits

Audit practices are discussed, including factors that might trigger a transfer pricing audit. These include a high volume of intercompany transactions, inconsistent profit levels, issues with thin capitalization, and non-compliance with transfer pricing documentation requirements.

Transfer Pricing Documentation Levels

Master, Local, and Special Issue Files

China mandates three levels of documentation: the Master File, Local File, and Special Issue File. The Master File covers organizational structure, business description, intangibles, financial data, and more. The Local File details the enterprise, related party transactions, comparability analysis, and transfer pricing methods. Special Issue Files are required for cost sharing agreements and thin capitalization situations.

Industry & Company Analysis

Analyzing Profitability

The document emphasizes the importance of industry and company analysis for transfer pricing, helping establish profitability benchmarks specific to the relevant industry.

Functional Analysis & Transfer Pricing Methods

Determining Functional Roles

Functional analysis focuses on identifying significant activities and responsibilities performed by related parties involved in intercompany transactions. The document discusses various transfer pricing methods recognized by Chinese tax authorities.

Economic Analysis & Benchmark Studies

Comparables in China

China’s tax authorities tend to accept local comparables for benchmarking. They may use secret comparables in some cases but generally encourage using public information.

Record Keeping & Penalties

Compliance and Consequences

Transfer pricing documentation must be kept for ten years. Failure to prepare or submit documentation can lead to penalties ranging from RMB 2,000 to RMB 10,000, along with the potential for special tax adjustments and interest charges.

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