Homing in on transfer pricing

For 2008 transactions, the deadline for completing contemporaneous documentation was December 31 2009. Contemporaneous documentation for 2009 and onwards must be prepared and completed by May 31 subsequent to the year which related party transactions took place. Taxpayers are not required to submit the reports to the tax authority until requested.

Different approaches in document collection

As the December 31 deadline has already passed, Chinese tax authorities are now actively collecting documentation from taxpayers. Tax authorities in different parts of China have been taking different approaches. Their actions demonstrate that they are serious about enforcing the transfer pricing rules and, most importantly, protecting the tax revenue base.

Larger tax authorities such as Beijing, Shanghai, Shenzhen, Zhejiang and Jiangsu have indicated they will ask for the submission of 2008 transfer pricing documentation from companies in targeted industries and focus on large multinational companies with significant related party transactions.

On January 13 2010, the Shenzhen State Tax Bureau issued a notice on transfer pricing administration that instructed subordinate district tax bureaus to collect 2008 transfer pricing documentation from certain companies identified in a list. The companies on the list had total revenues in excess of Rmb100 million. They were required to submit 2008 transfer pricing documentation by March 20 2010. As for the contemporaneous documentation for 2009 and onwards, the deadline for submission will be June 20 the following year. The notice also encourages the voluntary submission of documentation by companies with total revenues of less than Rmb100 million.

In contrast, tax authorities in Tianjin, Shandong and Guangzhou are not going to pick and choose. They have issued notices on the collection of transfer pricing documentation stating that they will collect all the documentation from all companies required to prepare contemporaneous documentation.

Loss-making companies

The Guangzhou tax authority also confirmed they would apply notice Guoshuihan (2009) No. 363 to the 2008 and transfer pricing documentation should have been submitted by December 31 2009. Guoshuihan (2009) No. 363 was issued by the SAT on July 6 2009. The Guangzhou tax authority intends to scrutinise companies with cross-border transactions that were established by multinational company groups, including those engaged in single manufacturing, distribution and contract research and development services.

Regardless of whether the relevant transaction thresholds are met, all loss-making companies are required to prepare transfer pricing documentation for the year they post a loss. For 2009, these companies are required to submit the transfer pricing documentation by June 20 2010.

In order to protect China's tax base, it is expected that there will be more challenges from tax authorities on loss-making companies in coming years. Transfer pricing investigations and adjustments would be made to the cases that are considered as shifting losses to China or shifting profits to tax haven countries.

Taking action

The issuance of the above notices has shown the Chinese tax authorities' determination to tighten transfer pricing compliance enforcement and to protect the tax revenue base. If companies have not prepared the transfer pricing documentation for 2008 per Circular 2, they are highly recommended to complete this as soon as possible. For 2009 documentation, companies should also commence work now and have the documentation completed by May 31 2010.

Any non-compliance with the Chinese transfer pricing regulations will result in penalties, adjustment of taxable income, penalty interest and increased scrutiny from the tax authorities.

Catherine Tse, Mazars, Hong Kong