China’s State Administration of Taxation (SAT) has issued a consultation draft encompassing transfer pricing documentation; comments are due by 16 October 2015. The draft includes OECD BEPS Action concepts, such as the form of transfer pricing documentation, although retaining arguable local concepts and introducing intangible definitions prior to the final OECD Guidelines.
- The three tier TP documentation concept of Master File, Local File and Country-by-Country report (for Chinese based multinationals) is introduced.
- A “Special File” is also required for intercompany services, providing copies of agreements, allocation keys and evidence supporting the “benefit test.”
- “Intangibles” is broader than the OECD proposals, including marketing channels and customer lists.
- Advance Pricing Agreement (APA) procedures are clarified.
- The use of transfer pricing comparables is broad and runs counter to the transparency or consistency test. The use of secret comparables, one comparable, one or multiple year results are allowed.
- Anti-shifting provisions are to be used for transactions with entities of little substance, thereby increasing Chinese profits.
- Profitability monitoring will be used to establish a tax risk hierarchy system.
Although the Consultation report includes consistent BEPS measures, there are also concepts included that do not provide consistency with other countries, increasing the risks of double taxation. Thereby, China is inwardly focusing on its fisc while representing a “rogue” player on the OECD playing field.
All multinationals with operations in China should determine their course of action for these proposals, including a review of holding companies for intercompany transactions with Chinese entities.