china related party transactions and tp documentation rules. china_sat bulletin 42 _ briefing...

China Related Party Transactions and TP Documentation RulesHighlights10 August 2016

China Related Party Transactions and TP Documentation Rules 2016. For information, contact Deloitte China. 2

Related Party Transactions and TP Documentation Rules

Bulletin 42 is a significant revision and update of Chinas related party transactions and TP documentation rules: compliance burden for and level of transparency required of companies increased. Disclosures made in relation to global supply chains in particular, may led to China arguing for tax on a larger share of companies global profits.

Formalizes response to OECD/G20 BEPS Action 13: China confirms position as a first mover. Adopts BEPS Action 13 recommendations and adapts them for Chinas unique economic environment and development factors.

Only related party transactions and TP documentation rules contained in Circular 2 revised: other provisions of Circular 2 remain in force. Revisions of those other provisions still expected, but timing uncertain.

Aligned with OECD recommendations and adapted for China


Bulletin 42 framework 4

Ensuring compliance 12

On the horizon 15

Contents


Bulletin 42 framework


Bulletin 42

Bulletin 42 is a significant revision and update of Chinas related party transactions and TP documentation rules. These new rules were issued in time for them to apply in relation to 2016. The remaining revised Special Tax Adjustments Rules are still in draft (issued September 2015). Implementation of these remaining provisions are still expected, although timing uncertain.

Related party transactions and TP documentation only

Articles Contents Articles Contents

1 Requirements for submitting PRC Annual Related Party Transactions Reporting Forms 10 17

Framework and thresholds for contemporaneous TP documentation Master file (11 12) Local File (13 14) Special Issue File (15 17)

2 3 Definitions of related party relationships 18 22 Language, and deadlines for preparation and filing

4 Types of related party transactions 23 - 25 Requirements to maintain records, and penalties for non-compliance

5 - 9 Country-by-country report filing requirements26 27, and Appendices

HK, Macau and Taiwan, and consequentialamendments. Reporting forms and filing instructions.

The Appendices to Bulletin 42 include the new PRC Annual Related Party Transactions Reporting Forms (2016 version) the 22 forms, along with filing instructions for the forms.


Related party forms, relationships and transactionsScope broadened, new compliance requirements introduced and existing rules refined

Related party relationships

Existing regulations largely retained, in particular, 25% shareholding as primary test

Definition broadened:

one partys production and operation is dependent on another partys intangibles

one party makes decisions concerning the other partys financial and operational strategies

common senior management

Expanded to cover situations where two parties have other substantial common interests

New calculation rules for control through debt, and aggregating shareholdings of natural persons

Related party transactions

Retains existing transaction types, provides clarification in relation to intangibles and specifically defines financial asset transactions

Transfers of financial assets such as equity to cover related party acquisitions/sales of shares specifically included

Financial transactions defined to specifically include group cash pooling and guarantee fees

Definition of intangible assets refined, in particular, land use rights excluded, and franchise rights and government licencesincluded

Related party transaction reporting forms

PRC Annual Related Party Transactions Reporting Forms updated, and now have 22 forms

Adds new disclosures for specific types of transactions

Requires disclosure of financial analysis forms in advance of filing TP documentation, requiring earlier preparation

Includes the country-by-country reporting template, which is consistent with BEPS Action 13 requirements


Country-by-country report

Required of Chinese tax resident enterprises:

Ultimate parent of the MNC group and have consolidated revenue over RMB 5.5 billion; or

Nominated as the filing entity by the multinational group

Form and due date of lodgment: one of the 22 related party transaction forms to be annually lodged together with the enterprises tax return and other applicable related party transaction forms by 31 May following the end of the relevant tax year.

Contents: aligned with BEPS Action 13

Non-Chinese MNC groups: CBC reports generally requested from relevant other tax authorities through applicable information exchange mechanisms. In the event of a TP audit, provision for special situations such as gap (implementation) years, failure of ultimate parent entity to file, lack of appropriate information exchange mechanism, failure of competent tax authority to provide, etc. Provisions for such exceptions aligned with OECD recommendations.

One of annual tax return forms, and aligned with BEPS Action 13


Master, Local and Special Issues FilesSeparate and independently operating sets of thresholds

Special Issues Files

Master File(part of Chinese TP

documentation, OECD/G20 adapted for China)

Local File(enhanced: detailed

value chain information requested)

Thin Capitalization

Cost Sharing Agreements

Master File 12 months after ultimate parent year end

A Chinese Master File is required if entity:

has transactions with an overseas related party, andultimate parent company has prepared a Master file; or

has related party transactions worth over RMB 1 billion

Contents aligned with BEPS Action 13 requirements

Special Issues Files 30 June of following year

Information is required for companies that have Cost Sharing Arrangements, or that exceed the applicable thin capitalization thresholds

The content of the required reports is nearly identical to the existing requirements in Circular 2.

Local File 30 June of following year

Local File is required if related party transactions exceed thresholds of: purchases/sales of tangible goods of RMB 200 million; or purchases/sales of financial assets or intangible assets of RMB 100 million; or other related party transactions of RMB 40 million

Required contents are effectively an enhanced local file. Including information concerning value chains (including location specific advantages and principles for allocating profit between entities), outbound investment, equity transfers, service arrangements, and APAs and rulings obtained in other countries


Chinese Master File

Chinese Master File may be required, even though entity is not required to prepare Local File: requires change in compliance approach

Information required for the Chinese Master File consistent with the BEPS Action 13 requirements

Chinese requirements may differ from the MNC home jurisdiction requirements, depending on how closely that home jurisdiction follows OECD requirements. In theory, the Chinese Master File may be a mere translation of the Master File prepared by the ultimate parent company; however, we expect multinational company groups to tailor the latter for submission.

In tailoring the ultimate parent companys Master File, need to consider strategy in relation to sensitive information, description of potentially controversial structures, such as central entrepreneur, IP and marketing services structures, and the use of particular terms that attract undue attention by Chinese tax authorities, such as management fees.

Likely required if ultimate parent company prepares a Master file


Local FileSignificant increase in disclosure requirements

Local File not required merely because Chinese Master or Special Issues Files required; threshold for Local File independently applicable.

Significant expansion of information requirements, compared to Circular 2. Key changes for inbound MNCs include:

Value chain analysis: Taxpayers asked for extensive details (including financial statements) for entities in the value chain, and the allocation principles and actual group profits through the value chain. Contribution of location specific advantages must be addressed.

Obtaining detailed information may be very difficult for some groups. The required level of information is unknown, and so care will be needed to present appropriate levels of detail at first.

Related party services: Comprehensive overview of the service arrangements required, including the benefits for each party to the transaction and methodology for calculating the service fees.

Taxpayers will also need to consider how to disclose complex service fees arrangements, and how to support the Bulletin 16 requirements for service fees (i.e. the six tests)

Related party equity transfers: Taxpayers asked for information about the acquisition or disposal of equity interests in related parties, including details of the transfer and the target entity, as well as valuation and due diligence reports.

Taxpayers will need to take care to account for any gains on disposal of direct or indirect equity holdings.


Special Issues Files

Cost Sharing Agreements: taxpayer participating in CSA

Copies of agreement, details of how CSA is intended to operate, and evidence of adherence thereto to be included

Ready for submission by 30 June of following year

Thin Capitalization: non-financial institutions with debt-to-equity ratios above 2:1, and financial institutions with ratios above 5:1

Demonstrate that the level of debt and applicable interest rates are arms length

Ready for submission by 30 June of following year

Existing compliance requirements fine tuned


Ensuring compliance


Ensuring complianceMaintain perspective, achieve balance, manage resources and leverage technology

PerspectiveStrategically manage from group transfer pricing perspective, not merely focus on local subsidiary compliance and reporting

ApproachBalance digital and manual processes, and deal with multiple deadlines across jurisdictions. Leverage technology.

BalanceBalance manageable

disclosure and meeting the

requirements?

ResourcesRecognize and work

with stakeholders outside tax, and co-

ordinate between in-house and external

advisors


Recommended approach

Self-assessment

Understand new requirements, within the particular context of affected Chinese entities and the multinational company group

Start now!

Get report preparation underway early: most qualitative analyses can be completed before year end

2016 is new base year for enhanced disclosure requirements: if wish to make change to business models and transaction structures, do so before end of the year

Gap analysis

Establish the gap between existing documentation and availability of information, and the new disclosure requirements

Formulate strategy

Make decisions concerning information collection, appoint appropriate teams, and determine how to prepare documentation

Centrally consider how to ensure consistency and accuracy of information, and alignment with CBC report

Plan for dealing with risks arising from increased disclosure

No longer business as usual, reset and rethink start now!


On the horizon


On the horizon

Remaining revision of Special Tax Adjustments Rules: discussion draft issued September 2015. Implementation of remaining provisions thereof still expected, although timing uncertain.

OECD work on profit splits (Actions 8-10): OECDs Discussion Draft on Revised Guidance on Profit Splits released July 4. Not yet a consensus document. Issued to facilitate discussion and obtain public comments. Comments due early September, and consultation to take place in October.

Chinas position on permanent establishments and attribution of profits thereto (BEPS Actions 7): SAT still studying issues in relation to PEs in particular, the attribution of profits thereto, in particular, the use of deemed profits basis for such profit attribution. No definitive conclusion yet reached. Likelihood of formal SAT issuing guidance concerning these issues in 2016 is "low".

Further significant China SAT and OECD developments expected


TP audits in ChinaObservations from our recent cases

Expert panels reviewing cases of significance: SAT using expert panels made up of five tax officials apparently randomly selected from a pool of 50. Panels review proposed adjustments and may return cases for further consideration by local tax bureaus. Decisions of panels are required to be unanimous.

Previously, expert panels appeared to focus on adjustments of tax payable of over RMB 50 million. Recent experience indicates a lower threshold, perhaps RMB 10 million, with a higher priority for:

Non-trade related party payments Settlements that appear to merely adjust an entitys overall profitability (TNMM)

Implications for formal TP audits: Expert panels appear now to be taking a more analytically rigorous approach in their review of disputed cases, rather than accepting settlements based on the entitys overall profitability. As a consequence, formal audits are likely to take longer to conclude. A work around considered by taxpayers is to agree self-assessed adjustments with local tax bureaus, without a formal TP audit being conducted. Although taxpayers may consider this option to avoid delays associated with formal TP audits, they should note that voluntary self-assessed adjustments are not subject to MAP.

SAT internal reorganization: New team, Division 3, set up to conduct national TP audits (local TP audits, still carried out by local tax authorities, with SAT approval). Potentially more SAT driven national TP audits of selected industries and as follow up from additional disclosures in TP documentation.

Existing Division 1 and Division 2 groups have new responsibilities: organizing the expert panel reviews of cases, and conducting APA negotiations respectively. These teams were previously geographically focused, rather than being issues focused.

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china related party transactions and tp documentation rules. china_sat bulletin 42 _ briefing...

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