The documentation shall contain the following:
- Organisation structure, such as global organisation and shareholding structure of the group, description of any change of shareholding or organisation structure, related tax and preferential tax treatment of each associated party;
- Overall business operation, such as business overview of the company, industry analysis, company development, composition of principal activities, market position and competitors, internal organisation structure, functions and risks consolidated financial statement of the groups;
- Description of related party transactions, such as type of each transaction, trading mode, supply chain information covering both physical product flow, cash flows and transfer of title, intangible assets, copies of related contracts, sales, costs and expenses and profits analysis;
- Comparability analysis, such as functions and risks, source of comparables, selection method and reasons, and benchmarking results;
- Description and justification of transfer pricing methodology, such as reasoning, assumptions or other information supporting the selected transfer pricing methodology.
a) Which transactions must be documented (all transactions with associated enterprises, or only those which exceed a particular threshold)?
Companies obliged to make transfer pricing declarations must document all their related party transactions. For the time being, no threshold has been provided by related tax regulations.
b) What is the definition of “associated enterprises” for the purposes of this requirement?
Chinese law does not define “associated enterprises”, but defines “associated relationship” which is used to determine “associated enterprises”. An “associated relationship” includes:
- Direct or indirect ownership of more than 25% of equity interests / shares of the other party, or direct or indirect ownership by a third party of more than 25% of equity interests / shares of both parties. Where there is an intermediate party or parties, ownership of more than 25% equity interests / shares by an intermediate party provided that one party holds at least 25% in such intermediate party;
- Loan representing more than 50% of the total paid-up capital of the other party, or security interests representing more than 10% of the loan (not applicable to independent financial institutions);
- Control of the management decision making of the other party through appointment of high ranking staff;
- Dependence on proprietary technologies (such as industrial property rights, technology know-how etc) of the other party in order to carry out activities;
- Control of purchases and sales activities or services by the other party;
- Control of the activities of the other party by other means, such as family members and relatives, etc, irrespective of the shareholding ratio as mentioned in point 1. above.
c) For EU countries, is the content of the documentation similar to that described in the EU Code of Conduct on transfer pricing documentation for associated enterprises (“EU TPD”)? If not, are taxpayers entitled to choose between the local requirements and the EU TPD?
d) Do taxpayers which are not established in your jurisdiction need to undertake to provide any specific information upon request? Can your tax authorities require the taxpayer in your jurisdiction to provide information which is located in another state?
Taxpayers who are not established in China do not need to commit to provide specific information on the request of the tax authorities. If the tax authorities wish to obtain such information, they should either implement the information exchange procedures provided for in bilateral tax treaties, or ask the Chinese company to provide information related to foreign associated companies.
e) If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)?
Chinese law does not contain explicit provisions on this issue. The tax authorities do not exclude the possibility of applying benchmarks of companies in other Asian countries. However, we consider that such application would be quite limited.
f) What language(s) are to be used by taxpayers in submitting the transfer pricing documentation?
The documentation as well as any appendix must be submitted in Chinese. In the absence of a Chinese version, a Chinese translation must be submitted.