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Company nameCompany
LOGO
Ning SongNing SongSenior PartnerSenior PartnerPrince Zi
WangPrince Zi WangTax ManagerTax ManagerChina Taxation Agency Co.,
LtdChina Taxation Agency Co., Ltd
Special Tax Adjustment Implementation Measures
&Transfer Pricing
Documentation Compliance in China
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Agenda
I. Special Tax Adjustment Implementation Measures (the Final
Measures)
A. Regulation developmentB. RPT reportingC. Contemporaneous
DocumentationD. TP Investigations & Adjustments
II. TP Documentation ComplianceA. General mattersB.
Documentation approachesC. TP master file
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
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Company nameCompany
LOGO
Special Tax Adjustment Implementation
Measures(the Final Measures)
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I. The Final Measures
A. Regulation development
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
Guoshuifa [1998] No.59 Guoshuifa [2004] No.143 Guoshuifa [2004]
No.118
FEIT Income Tax LawEIT Income Tax Law
Unified EIT Income Tax Law
(New EIT Law)
Implementation Measures for
special tax adjustments(the Final Measures)
the Draft Measures in March, 2008
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A. Regulation development (Contd)
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
New EIT Law
the Measures
Chapter 6Chapter 6
13 chapters 13 chapters
118 provisions118 provisions
To ensure high standard and consistency in TP enforcement and
administration;
To correct certain Chinas old TP regime with past experiences in
investigation cases.
Our Observations SAT Achievements
I. The Final Measures
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A. Regulation development (Contd)
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
Chapter 1: General Provisions;Chapter 2: Reporting of Related
Party Transactions (RPT);Chapter 3: Administration of
Contemporaneous Documentation;Chapter 4: Transfer Pricing Methods
(TPM);Chapter 5: TP Investigations & Adjustments;Chapter 6:
Administration of Advance Pricing Arrangements (APA);Chapter 7:
Administration of Cost Sharing Agreements (CSA);Chapter 8:
Administration of Controlled Foreign Corporations (CFC);Chapter 9:
Administration of Thin Capitalization;Chapter 11: Corresponding
Adjustments & International Consultation;Chapter 12: Legal
Obligations;Chapter 13: Supplementary Provisions.
I. The Final Measures
the Final Measures
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B. RPT reporting
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
Form 1 - disclosure of related-party relationships Form 2 -
summary of related-party transactions Form 3 - sales and purchases
Form 4 - services Form 5 - transfer of intangible assets Form 6 -
transfer of fixed assets Form 7 - financing Form 8 - outbound
investment Form 9 - outbound payments
FIE RPT reporting on Form A-13-A/B
Under New EIT LawAll Enterprises
I. The Final Measures
the Final Measures
Article 43
Article 11
RPT Forms [2008]114
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B. RPT reporting (Contd)
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
Disclosure on asset transfers is now separated into the
disclosure of inter-company use and sale of intangible assets and
fixed asset transfers.
Thin capitalization related disclosure is now combined with
financing transactions disclosure in one form.
Controlled foreign corporation related disclosure now is in
Outbound Investment.
These changes have reduced the number of forms from 10 to 9.
I. The Final Measures
the Final Measuresthe Draft Measures
Updates
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B. RPT reporting (Contd)
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
RPT reporting obligation for non-resident enterprises that have
establishments in China and file and pay corporate income tax on an
actual basis;
RPT reporting indication of in place contemporaneous TP
Documentation;
Absence of guidelines on year-end compensating adjustment. the
SAT has reservations on it. Such year-end adjustments might be
viewed as TP manipulation. Thus, enterprises should evaluate their
TP policies and practices throughout the whole versus year-end
only;
I. The Final Measures
Highlights
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C. Contemporaneous Documentation
a. Who?
b. When?
c. What?
d. How?
Article 43
China Taxation Agency Co., LtdChina Taxation Agency Co., LtdI.
The Final Measures
Article 9
Article 16 Article 116
Article 14
II. TP Documentation Compliance
Article 15
Article 20
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a. Who?RP identification
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
8 criterion
I. The Final Measures
Article 43
Ownership
Effective Control
Updates
the ownership threshold is revised back to 25% from the 20% in
the Draft Measures.
Indirect share ownership;Major financers;Common
management;Significant suppliers & customers.Highlights
Enterprises should carefully review all
types of relationships to do the disclosure
compliance
Article 9
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a. Who? (Contd)Exemption Article 43
China Taxation Agency Co., LtdChina Taxation Agency Co., LtdI.
The Final Measures
There are 3 kinds of enterprises that are exempt :
Entities below a certain volume- threshold of RPT;
Entities with RPT covered by an APA;
Entities that do not have significant foreign ownership and do
not have any cross-border RPT.
Highlights
Elimination of the simplified Documentation obligation
Annual RPT from 20 million to 200 million or 40 million
(financing)
Toll manufacturing based on import/export customs declaration
prices
Foreign ownership lower than 50% as a supplementary regulation
for domestic RPT exemption
Updates
Article 15
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b. When?
China Taxation Agency Co., LtdChina Taxation Agency Co., LtdI.
The Final Measures
Article 43May 31 and kept for 10 years; 20 days upon request and
20 days extension for uncontrollable force.
Highlights
For FY2008, December 31 Submission and extension dates extended
from 15 to 20
Updates
Although the deadline is prolonged to be Dec 31, 2009 RPT
reporting deadline is May 31, 2009 with an indication of in-place
TP Documentation; TP Documentation is the basis for completing RPT
reporting (data consistence); TP Documentation can be hand over to
tax bureau during tax audit; TP adjustment needs to be done, when
necessary, as early as possible; TP Documentation is time consuming
itself, especially on a group consistence manner.
Observations
Article 16 Article 116Article 20
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c. What?
China Taxation Agency Co., LtdChina Taxation Agency Co., LtdI.
The Final Measures
Article 43 1. Organizational Structure 2. Overview of Business
Operations 3. Information Regarding Related Party Transactions 4.
Comparability Analysis 5. Selection and Application of Transfer
Pricing Methodologies
Highlights
In 1.(3) detailed the related party information disclosure
In 2.(5) financial report of tested party and related party are
changed to be group consolidated financial repot In 3.(7)
explanations supporting the financial allocation rationale
Updates
Article 14
The Final Measures provide no preference or hierarchy for
selecting TPM, flexibility and challenge of proof co-exist
Observations
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D. TP Investigations & Adjustments
China Taxation Agency Co., LtdChina Taxation Agency Co., LtdI.
The Final Measures
Article 43Article 297 types of enterprises that are key targets
for TP audit : Enterprises with a large amount of RPT or have
multiple types of RPT; Enterprises with long-term loss, marginal
profit or fluctuating profit; Enterprises with profit level lower
than the industry level; Enterprises with profit levels obviously
do not match with the functions performed and the risks assumed
Enterprises which have transactions with associated parties
registered in a tax haven Enterprises which fail to make a
declaration of their related party transactions or prepare
contemporaneous documentation based on regulations; and Other
enterprises which obviously disobey the arm's length principle.
Highlights
Deleted Enterprises with profit level lower than its group
level
Updates
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D. TP Investigations & Adjustments (Contd) Article 43
China Taxation Agency Co., LtdChina Taxation Agency Co., LtdI.
The Final Measures
TP audit immunity
RPT between domestic related parties with the same actual tax
rate, as long as the RPT does not directly or indirectly result in
the reduction of tax revenue as a whole.
Highlights
An enterprise may provide contemporaneous documents to tax
authorities during desktop verification and analysis.
The tax authorities may use non-public information for the
analysis and evaluation;
Official clarification of the use of Inter-quartile Range
The enterprise should provide contemporaneous documents for a
supervision year before June 20 of the following year during the
follow-up supervision period.
Updates
Article 30
Article 37
Article 41
Article 45
Article 31
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D. TP Investigations & Adjustments (Contd)
Article 43
China Taxation Agency Co., LtdChina Taxation Agency Co., LtdI.
The Final Measures
Wrap upWrap up
Follow upFollow up
Select target
Transfer Pricing Audit Procedures
Investigation
TP Documentation
HighlightsEnterprises can provide
TP Documentation during desk-top review, which
may reduce the chance of further TP audit, given
that the TP Documentation in place is
appropriate prepared.
Article 31
ObservationsThe Final
Measures are silent on any limits to the
duration of the investigation.
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D. TP Investigations & Adjustments (Contd)
China Taxation Agency Co., LtdChina Taxation Agency Co., LtdI.
The Final Measures
Select target
Wrap up
Follow up
SelectTarget
Investigation
Desk Audit
Notice Issuance
Eliminated Non-targets
SelectedTargets
Field Investigation
Report for Approval
Docketing a Case
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D. TP Investigations & Adjustments (Contd)
Select target
China Taxation Agency Co., LtdChina Taxation Agency Co., LtdI.
The Final Measures
Wrap up
Follow up
SelectTarget
Investigation
Desk Audit
Preliminary Adjustment
Field Investigation
Information Request
Outbound Investigation
Proof and Negotiation
Investigated Issues And
Preliminary Adjustment Proposals
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D. TP Investigations & Adjustments (Contd)
China Taxation Agency Co., LtdChina Taxation Agency Co., LtdI.
The Final Measures
Select target
Wrap up
Follow up
SelectTarget
Investigation
Adjustment proposal
Report for Approval
Formal Notice
Tax Adjustment and Settlement
Tax Under Payment
Collection
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D. TP Investigations & Adjustments (Contd)
Select target
China Taxation Agency Co., LtdChina Taxation Agency Co., LtdI.
The Final Measures
Wrap up
Follow up
SelectTarget
Investigation
Administrative Reconsideration
Litigation
Bilateral Negotiation
ApplicationAccepted or not?
HighlightsTP issues identified during the follow-up
period do not necessarily result in an audit the tax authorities
shall first communicate with the enterprise in a timely manner
and
may request to make a voluntary self-adjustment
Article 45
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Company nameCompany
LOGO
Transfer Pricing Contemporaneous
Documentation Compliance
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A. General matters
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
II.TP Documentation Compliance
Legislation angle, Who? When? What?
Initiatively, Why?TP audit immunityDesk-top review
turn-backPenalty component
How?Time limit26 items coverageLinkage with RPT reporting
complianceCase by case work load / Compliance cost
Article 107
Article 14
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B. Documentation approaches
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
II.TP Documentation Compliance
Factual Review
Factual Review
Industry Analysis & Function and Risk Analysis
Industry Analysis & Function and Risk Analysis
Financial Analysis
Financial Analysis TPM
SelectionTPM Selection
ComparableSet Selection
ComparableSet Selection
EconomicAnalysis
EconomicAnalysis
TP Documen-tation
TP Documen-tation
Interview to collect functional information & potential
comparable transactions
Interview to collect functional information & potential
comparable transactions
Identify RPT and tested party, analyze their F&R
Identify RPT and tested party, analyze their F&R
Segment and analyze financials
Segment and analyze financials
Select best TPM
Select best TPM
Set search criteria and select comparable set
Set search criteria and select comparable set
Select PLI and conduct economic analysis
Select PLI and conduct economic analysis
Draft report and final report
Draft report and final report
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B. Documentation approaches (Contd)
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
II.TP Documentation Compliance
Factual Review
Factual Review
Article 14
363
IDR Questionnaire
Industry Analysis & Function and Risk Analysis
Industry Analysis & Function and Risk Analysis
F&R
Profitability
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Internal communication
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
Tax / Finance Dept. Operating Dept. Effective Communication
The Final Measures
Interview &F&R Analysis
Interview &F&R Analysis
R&D
Manufacturing
Sales & Marketing
After sale services
Management & Administration
II.TP Documentation Compliance
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B. Documentation approaches (Contd)
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
II.TP Documentation Compliance
Financial Analysis
Financial Analysis
Review incl. number matching-up with RPT report
Segmentation
Special factor analysis & adjustment
Capital adjustment (SAT approval)
TPM Selection
TPM Selection
TPMTPM
CUPCUP
RPRP
CPCP
TNMMTNMM
PSPS
TargetTarget
PricePrice
Operating Profit
Operating Profit
Gross Profit
Gross Profit
PLIPLI
Unit PriceUnit Price
OM NCP
Berry RatioROA/ROE
OM NCP
Berry RatioROA/ROE
GM
GCP
GM
GCP
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B. Documentation approaches (Contd)
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
II.TP Documentation Compliance
ComparableSet Selection
ComparableSet Selection
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B. Documentation approaches (Contd)
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
II.TP Documentation Compliance
EconomicAnalysis
EconomicAnalysis
-15%
-12%
-8%
1%
9% 9%
14%
18%
Median7%
2%
Upper
Quartile
-3%
11%13%
C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C12 C13
Lower
Quartile
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B. Documentation approaches (Contd)
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
II.TP Documentation Compliance
TP Documen-tation
TP Documen-tation
Stamped with official chop and signed or sealed by legal
representatives In Chinese
HighlightsUpon request, or obliged to provide under
investigation, sufficient and professional explanation and
discussion with the tax bureau is a strong plus for the report.
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C. TP master file
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
II.TP Documentation Compliance
Language Localization
TPM Localization
PLILocalization
Comparable SetLocalization
Taxpayer with TP Documentation master file
Taxpayer without but would be effective to haveTP Documentation
master file
Economic analysis update only
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Incorporated in January, 1997, China Taxation Agency Co., Ltd.
is one of the pioneer and leading tax advisory firms in China.
Formerly affiliated to State Administration of Taxation, CTAC was
transformed into an independent partnership in 2000. Headquartered
in Beijing and Hong Kong, CTAC has branches covering major cities
across China, providing integrated professional tax services to
national and international large enterprises.
CTACChina Taxation Agency Co., LtdChina Taxation Agency Co.,
Ltd
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China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
Ning SongSenior Partner
Tel 86 10 8235 6420-696Fax 86 10 8235 0239Mobile +86 139 1122
9212Email [email protected]
CTAC speaker
Mr. Song is a Senior Partner of China Tax Agency Co., Ltd. He
has served a number of our key domestic and MNC clients in
China-US, China-JP BAPA negotiation, transfer pricing audit
defense, and transfer pricing planning, documentation,
benchmarking, etc.
Before Join CTAC, Mr. Song was TP Senior Manager of one of Big
Four and led its North China TP team.
Mr. Song also has more than fourteen years of experience with
China tax authorities, including eight years in the transfer
pricing area. He had also played a key role in many national joint
transfer pricing audits and bilateral Advance Pricing Agreement
negotiations. In addition, he had actively participated in drafting
new tax laws and rules, including Chinas APA rules, TP Regulations,
and the new EIT tax law Chapter VI.
Mr. Song is CTA and has received Economics Master degree and
LL.M. in Taxation.
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China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
Prince WangTax manager
Tel 86 10 8235 6420-663Fax 86 10 8235 0239Mobile +86 131 2117
4565Email [email protected]
CTAC speaker
Ms. Wang is tax manager of CTAC, she has wide experience in
various types of TP practice, provided all kinds of TP services to
multinational firms from different industries.
Before joining CTAC, Prince had 3 years working experience in a
Big 4s Transfer Pricing Team, taking the role of client service
senior level staff, especially for giant multinational clients
nationwide projects.
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Q&AQ&AThanks!Thanks!
China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd
Special Tax Adjustment Implementation Measures&Transfer
Pricing Documentation Compliance in China AgendaI. The Final
MeasuresI. The Final MeasuresI. The Final MeasuresI. The Final
MeasuresI. The Final MeasuresI. The Final MeasuresI. The Final
MeasuresI. The Final MeasuresI. The Final MeasuresI. The Final
MeasuresI. The Final MeasuresI. The Final MeasuresI. The Final
MeasuresI. The Final MeasuresI. The Final MeasuresI. The Final
MeasuresI. The Final MeasuresI. The Final MeasuresII.TP
Documentation ComplianceII.TP Documentation ComplianceII.TP
Documentation ComplianceII.TP Documentation ComplianceII.TP
Documentation ComplianceII.TP Documentation ComplianceII.TP
Documentation ComplianceII.TP Documentation ComplianceII.TP
Documentation Compliance