3. TAXATION IN THE MAINLAND CHINA
3.5 TRANSFER PRICING DOCUMENTATION RULES
The transfer pricing ("TP") issue becomes one of the most critical concerns to enterprise with multi-national and cross-border operational business. Generally speaking, TP issue becomes crucial focus of the tax authorities on those multi-national corporations. In particular, PRC tax authorities will mainly focuses on the area so-called "RELATED PARTY TRANSACTIONS".
Recently, the State Administration of Taxation ("SAT") in PRC takes tight enforcement on TP documentation subject to Foreign Investment Enterprise ("FIE") and a set of detailed documentation requirement will be taken effect in the near future in parallel to the implementation of the newly revised Company Income Tax Law ("CIT") which is effective from 1 January 2008.
TP is more concerned about the transactions incurred between the related parties - according to the Circular (1998) 59, it is defined the term "related party" as the associated relationship mainly covers the following areas:
3.51 THE NEW TP DOCUMENTATION REQUIREMENTS
- One entity directly or indirectly owns 25% or more equity interest of another entity;
- A third party owns 25% or more equity interest of two companies;
- An inter-company loan is over 50% of its capital or while 10% of the total loan is guaranteed by another company;
- Over 50% of the board of directors or managers of a company are appointed by another company;
- One entity can control the sales of products of another company; and
- One entity can control the supply of the raw material and spare parts.
In order to meet the stringent TP documentation requirements of the revised new CIT law, the following forms will be applicable.
|A13A|| Brief introduction of related parties|
|A13B|| Transactions with related enterprises|
|A1301|| Overview of the related enterprises and transactions|
|A1302|| Related sales and purchases of goods|
|A1303|| Service provision to / received from related parties|
|A1304|| Related party financing|
|A1305|| Related sales and purchases of tangible assets|
|A1306|| Related sales and purchase of intangible assets|
|A1307|| Other related transactions|
3.52 SERIOUS CONSEQUENCE AFTER NON-COMPLIANCE WITH THE NEW TP DOCUMENTATION REQUIREMENTS
Pursuant to Article 48 of CIT law, taxpayers are subject to a late payment surcharge on the additional tax attributable to TP adjustments. It is anticipated that the late payment surcharge is calculated based on the benchmark bank loan interest rate set by Bank of China, it will be at the ceiling of 5% flat rate.