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.
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  No. 02), “Notice 42,” “Notice 64,” “Notice 6,” and “Notice 46.”
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.
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.
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.
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.
The document emphasizes the importance of industry and company analysis for transfer pricing, helping establish profitability benchmarks specific to the relevant industry.
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.
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.
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.