China

Introduction

China is not an OECD member state; however, the OECD Guidelines influenced China’s transfer pricing legislation.

In 2009, the State Administration of Taxation (SAT) issued numerous transfers, regulations, and rules related to pricing.

In June 2016, China introduced new transfer pricing compliance rules.

Related Parties

If a party owns 25%, it is given either direct or indirect ownership or control. It applies if one party owns another party or two parties are owned by a related party. The formula for calculating the percentage ownership: if there is 25% or more ownership in a higher-level subsidiary, it is counted as 100% by multiplying the equity stake percentage of each lower level of indirect ownership.

Other criteria, including loans, management control, or different types of control, may also be considered.

Transfer Pricing Methods

The State Administration of Taxation Public Notice No.6 of 2017 states that the accepted methods are as follows:

• Comparable Pricing Method between Independent Parties
• Resale Price Method between Independent Parties.
• Cost plus Profit Method.
• Profit Split Method.
• Transactional Net Margin Method.
• Other Methods.

Transfer Pricing Documentation

Master File

Any company that meets one of the following criteria shall prepare a master file:

1. The company with related cross-border transactions parties during the respective fiscal year and the multinational group to which the ultimate parent company belongs.
2. The total annual amount of the company’s related party transactions exceeds RMB 1000 million.

The master file shall be completed within 12 months after the end of the fiscal year of the last holding company of the business group.

Local File

Any company that meets one of the following criteria during the fiscal year shall prepare a local file:

1. The annual transfer of related party ownership of tangible assets exceeds RMB 200 million.
2. The annual related party transfer of financial assets exceeds RMB 100 million.
3. The annual transfer of intangible asset ownership to related parties exceeds RMB 100 million.
4. The total annual amount of other related party transactions exceeds RMB 40 million.

The Local File must be completed before June 30 of the year following the year during which the transactions between parties are entered into.

Country by Country Report

The ultimate holding company of a group of multinational companies whose consolidated group revenue exceeds RMB 5.500 million during the fiscal year to be filed.

The Country-by-Country Report is included in the Annual Related Party Transaction Report Form to be filed in the annual tax return.

Special Edition File

It is required for taxpayers participating in cost-sharing arrangements or under the thin capitalization requirement.

It must be completed before June 30 of the year following the related party transactions. Please note that local tax authorities may require an earlier filing date in practice.

Penalties

If a company fails to prepare or files the Annual Related Party Transaction Information Forms or the transfer pricing documentation with false or misleading information, the tax authority may impose a penalty ranging from RMB 2,000 to RMB 10,000.

The tax authority may charge an additional 5% interest on the lending rate published by the Bank of China.