On 29 June 2016, the State Administration of Taxation of China (SAT) issued “Public Notice 42 ”, significantly changing the compliance landscape of the Chinese transfer pricing industry.
On 29 June 2016, the State Administration of Taxation of China (SAT) issued “Public Notice 42”(1), which significantly changes the compliance landscape of the Chinese transfer pricing industry to a new level (2). The issuance of Public Notice 42 also signifies official implementation in China of the OECD (3) Base Erosion and Profit Shifting (BEPS) project.
This notice primarily affects multinational enterprises (MNEs), including:
Australian subsidiaries of Chinese parent entity
Chinese subsidiaries of Australian parent entity.
Similar to the legislative changes (4) introduced in Australia in 2015 and the OECD BEPS project (5), Public Notice 42 adopts a three-tiered approach for transfer pricing contemporaneous documentation.
In addition, the new Annual Reporting Forms for Related Party Transactions (RPT Forms) which now comprise Country-by-Country Reporting (CbCR) have increased from 9 tables to 22 tables.
Following enterprises will be required to complete CbCR:
Ultimate holding company of the group with consolidated revenues over RMB 5.5 billion during the previous fiscal year (i.e. the first reference year is 2015 fiscal year); or
Nominated by the group to file the CbCR.
Apart from the CbCR, the “new” disclosure matters in the 22 tables include: Organisational structure, information of overseas related parties and segmented financial information etc. The new RPT Forms should be lodged (due date for the first lodgement is 31 May 2017, subject to possible extension) together with the annual corporate income tax return package.
Australian subsidiaries of Chinese parents should consider the following:
To proactively coordinate with Chinese parents in framing the master file, and ensure the disclosure consistency between Chinese and Australian information;
Although the local file and CbCR lodgement deadlines (6) in Australia are later than those in China, subsidiaries should allocate resource in advance to closely coordinate their Chinese parents in collating data required for Chinese RPT Forms (including CbCR); and
If the cross-border related party transactions are significant, subsidiaries should maintain timely and smooth communication with Chinese parents in the course of the latter’s preparation of the local file, and achieve consensus on respective role performed to the group’s value chain and profit contribution. This would help mitigate the group’s overall transfer pricing risk whilst increasing the cost efficiency for local compliance in Australia for the subsidiaries.
Chinese subsidiaries of Australian parents should consider the following:
In the event of the master file prepared by the Australian parents on a group level, subsidiaries in China should consider (based on the Chinese requirements on contemporaneous documentation) whether the master file needs to be tailored for local compliance purposes;
To proactively coordinate with Australian parents in framing the master file, and ensure the disclosure consistency between Chinese and Australian information;
To collate from parents information of overseas related parties in advance, facilitating the process of Chinese RPT Forms preparation;
If the cross-border related party transactions are significant, subsidiaries should maintain timely and smooth communication with Australian parents to achieve consensus on transfer pricing matters, which would help mitigate the group’s overall transfer pricing risk;
Australian parents, when setting up structures in China, should consider the compliance burden potentially arising from related party transactions among domestic entities in China; and
In the event of significant cross-border related party transactions, consider feasibility of entering into APAs, which would benefit in compliance exemption.
ShineWing Australia’s Transfer Pricing team has extensive experience in Australian and Chinese transfer pricing practice. We are your ideal companion to navigate you through the compliance transformation.
For more information, please contact Yang Shi, Senior Manager - Transfer Pricing.
Senior Manager, Transfer Pricing
T +61 3 8538 2217
E [email protected]
(1) Notice on Matters Regarding Refining the Reporting of Related Party Transactions and Administration of Contemporaneous Transfer Pricing Documentation (SAT Public Notice  No.42).(2) This notice replaces some provisions in Guo Shui Fa  No.2 and some provisions in Guo Shui Fa  No.114.(3) Organisation for Economic Cooperation and Development.(4) Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015.(5) Action 13 - Transfer Pricing Documentation and Country-by-country Reporting.(6) For December balancers, the first lodgement deadline is 31 December 2017; For June balancers, the first lodgement deadline is 30 June 2018.