China makes major changes to transfer pricing documentation and country-by-country reporting requirements

Tax Update


China’s State Administration of Taxation (SAT) on 13 July released on its website guidance that makes substantial changes that apply to multinationals’ transfer pricing compliance obligations for the 2016 fiscal year.

The Bulletin on Matters related to Enhancement of Inter-company Transaction Reporting and Administration of Simultaneous Documentation (ie Bulletin [2016] No. 42, Bulletin 42), replaces the transfer pricing documentation and the inter-company transaction reporting forms requirements under the Special Tax Adjustment Implementation Rules (Circular 2), and also formally introduces the China country-by-country reporting rules. 

Following the draft revision of Circular 2, released in September 2015 for public comment (Draft Revision), Bulletin 42 represents a major step for the SAT in implementing the OECD/G20 base erosion and profit shifting (BEPS) action plan in China. 

Unlike the Draft Revision, Bulletin 42 focuses on transfer pricing documentation, intercompany transaction reporting, and country-by-country reporting rules, but does not change other transfer pricing areas under Circular 2, such as transfer pricing methodologies, transfer pricing audits, advance pricing agreements (APA), cost sharing arrangements, and thincapitalization rules. 

Nevertheless, like the Draft Revision, Bulletin 42 increases taxpayer’s the disclosure and analysis requirements for with respect to transfer pricing arrangements. Bulletin 42 adopts a three-tier transfer pricing documentation structure composed of a master file, local file, and special file. Different and specific thresholds are provided for each type of file, and the contents required include many additions on top of the requirements of BEPS Action Plan 13. 

Master file 

The Thresholds. A master file shall be prepared by a Chinese enterprise, if either of the following conditions are met: 

  • The enterprise has cross-border inter-company transactions, and the MNC group that it belongs to has prepared a master file, or 
  • The enterprise's annual inter-company transaction amount exceeds RMB1 billion (about USD150 million).
The Contents. A master file shall disclose the relevant MNC group's overall global business situation, including organizational structure, business description, intangible structure, financing activities, financial and tax status of the group. In particular, a master file shall include, among others: 
  • A description of the key value contribution factors for the MNC group's global operation
  • A supply chain analysis of the group's key products or service, and
  • A description of the group's intangible strategy, portfolio, and major agreements. 
The Challenges. In practice, the presentation in a master file will be used the China tax authority as a basis to assess a Chinese enterprise's position, characterization, and contribution to the MNC group's global business. At the same time, the China tax authority may also cross check the master file's presentation with the CbC report they received through information exchange with competent authorities. In this regard, it will be critical for a MNC group to prepare a sound and comprehensive mater file that is consistent with the Chinese enterprise's local file and the MNC group's global financial result. It could be a bigger challenge if there are differences between the MNC group's transfer pricing arrangement inside and outside China, or if the MNC group has been making changes to the inter-company arrangement in China. 

Local file 

The Thresholds. A local file shall be prepared by a Chinese enterprise, if it exceeds any of the following thresholds in a particular year: 

  • Inter-company purchase/sale of tangible goods of above RMB200 million (about USD30 million)
  • Transfer of financial assets of above RMB100 million (about USD15 million)
  • Transfer of intangible assets of above RMB100 million (about USD15 million), or 
  • Other related party transactions of above RMB40 million (about USD6.2 million). 
The Contents. A local file shall disclose the Chinese enterprise's business operation and inter-company transactions, and also include a detailed transfer pricing analysis. The contents required under a local file are similar to those required under the previous Circular 2, but with the following additions: 

  • Management reporting lines, ie the reporting lines of the Chinese enterprise's management, and the location of the corresponding supervising personnel
  • Segmental financial data by different business operation and products
  • Analysis of intra-group restructuring and intangible transfers that have an impact on the Chinese enterprise
  • Value chain analysis based on the MNC group's business flow, goods flow, and funding flow, including analysis of special geographic factors that contribute to the Chinese enterprise's value creation, and 
  • Cost allocation methods used for inter-company service charges. 
The Challenges. China tax authorities in practice prefer separate transfer pricing analysis on different business activities and inter-company transactions. Bulletin 42 now formally requires inclusion of segmental financials as part of the local file, which can be a significant issue for Chinese enterprises that do not prepare segmental financials. On top of this, another challenge is how to present the segmental financial in line with the value chain analysis, or interpret the discrepancy. Furthermore, it remains unclear at this stage how to analyze special geographic factors (such as market premium and costs saving) and the profit contributions of each factor.

Special file

The Triggers. Unlike the Draft Revision, Bulletin 42 does not require preparation of special file on intra-group services. A special file shall be prepared if a Chinese local enterprise: 

  • Executes or implements an inter-company cost sharing arrangement (CSA), or 
  • Records a debt-equity ratio exceeding the prescribed limit1
The Contents. A special file shall record in detail the agreements of the CSA / intercompany debt financing, as well as the reasoning and justification behind the arrangements. 

At this stage, we do not expect many Chinese enterprises to begin preparing special files for 2016. In practice, CSAs are rare in China because of the absence of corresponding foreign exchange and tax procedures that allow tax-free expatriation/receipt of shared costs. 

On the other hand, a foreign-invested enterprise's borrowings from overseas affiliates normally cannot exceed the prescribed debt-equity ratio, because under the relevant foreign exchange regulation, a foreign invested enterprise's borrowing from overseas affiliates cannot exceed two times of its registered capital. In light of the above, the special file requirement should not be a substantial burden on most foreign-invested enterprises. 


The documentation thresholds do not distinguish domestic and cross-border inter-company transactions. However, if a Chinese enterprise does not have any inter-company transactions, it can be exempted from the documentation requirement. At the same time, if a particular inter-company transaction has been covered by an effective APA, the relevant transaction amount should not count towards the thresholds. 


Under Bulletin 42, a master file shall be completed within 12 months after the end of the fiscal year of its ultimate parent company. A local file and a special file shall be completed by 31 June after the calendar year. 

For example, if a Chinese enterprise's ultimate parent company has a fiscal year ending 31 March 2017, then the Chinese enterprise will be allowed to complete its 2016 master file by 31 March 2018. However, the Chinese enterprise needs to complete its 2016 local file and special file (if applicable) by 31 June 2017. 

Apparently, the SAT has taken into consideration the workload a MNC to prepare a comprehensive master file that may be used not only in China but also other countries and regions. However, to the extent possible, MNC groups should still try to generate a reliable master file before completing the local file and special file for its Chinese subsidiaries, so as to prevent unnecessary inconsistency between the master file and local / special file. 

New inter-company transaction reporting forms 

Under Circular 2 and beginning 2008, Chinese enterprises are required to complete nine inter-company transaction reporting forms as part of their annual enterprise income tax filing by end of May following each calendar year. The Bulletin 42 now includes 22 forms. 

The 22 inter-company transaction reporting forms can be divided into the following groups: 

  • Forms collecting basic information of the reporting Chinese enterprise and its overseas affiliates (2 forms)
  • Forms collecting inter-company transaction financials, by transaction type (12 forms)
  • Forms analyzing the financial result of domestic / cross border inter-company transactions and third party transactions (2 forms)
  • CbC reporting forms (6 forms, including 3 English and 3 Chinese, "CbC Forms"), which are required only when a Chinese enterprise is caught by the China CbC rules (see Section 3, below).
Taxpayers are expected to complete some of these forms based on their actual intercompany transactions. Timing wise, these new forms shall still be completed by 31 May following each calendar year, and be submitted as part of the annual enterprise income tax filing. 

The China CBC rules 

According to Bulletin 42, the following two types of Chinese resident enterprises shall file the CbC Forms starting from year of 2016: 

  • A Chinese resident enterprise, which is the ultimate controlling enterprise of a MNC group, and records a total revenue above RMB5.5 billion (about USD850 million) in its last year consolidated financial statement, or 
  • A Chinese resident enterprise that is designated by a MNC group to be the reporting enterprise for filing the CbC report. 
Given the above rules, a foreign-invested enterprise in China normally would not be a reporting entity for filing the CbC forms. However, in the circumstance of a transfer pricing audit, Bulletin 42 entitles China tax authorities to demand a foreign-invested enterprise's submission of the relevant MNC group's CbC reporting forms, if (i) the relevant MNC group shall have prepared CbC reporting forms based on the applicable laws of other tax jurisdictions, and (ii) any of the following circumstances are identified: 
  • The MNC group has not provided CbC reporting forms to any country
  • China has not established any information exchange mechanism with the country to which the MNC group has filed the CbC reporting forms, or 
  • The CbC reporting forms filed with the other country have never been successfully exchanged with China despite an existing information exchange mechanism. 

Our views 

China has been very active in implementing the BEPS Action Plan, especially from a transfer pricing perspective. Bulletin 42 is taking China's transfer pricing administration to a new and higher level. With the new transfer pricing documentation and the CbC report exchange mechanism in place, the China tax authorities will have a much better vision of an MNC groups' inter-company transactions and the inter-company transactions of foreign-invested enterprises. 

Given the enhanced compliance requirements under Bulletin 42, the transfer pricing risks for MNC groups with Chinese subsidiaries have been significantly increased in cases where the subsidiaries use inconsistent transfer pricing arrangements. It is critical that MNC groups and their Chinese subsidiaries align their transfer pricing policies, characterization, financial results, documentation, and other reports as soon as possible, so as to avoid internal conflict and inconsistency in documentation and reporting next year. 

As a pragmatic approach, it would be highly advisable for MNC groups and their Chinese subsidiaries to start planning for the 2016 transfer pricing documentation, as soon as possible. The requirements of Bulletin 42 undoubtedly will significantly add to the administration burden of foreign-invested enterprises as well as their MNC group headquarters. Close coordination between the MNC group headquarters, the Chinese subsidiaries, and their external tax consultants is crucial. 1 According to Circular Caishui [2008] No. 121, the inter-company debt-to-equity ratio normally shall not exceed 2:1 for non-financial enterprises, and 5:1 for financial enterprise. Otherwise, the interest expenses related to the excessive inter-company borrowing shall not be deductible.