china related party transactions and tp documentation rules...china related party transactions and...

China Related Party Transactions and TP Documentation RulesFrequently Asked Questions20 October 2016

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

Preface

The questions on the following slides have been asked by many of our clients concerning the SAT's Bulletin 42.

In this FAQ document, we provide simple answers thereto, based on which you may engage in a broader discussion with your Deloitte advisors.


Part 1 - CbC Reporting and the Definition of "Related Parties" 4

Part 2 – Master File 9

Part 3 – Local File and Special Issues File 14

Contacts 19

Contents


Part 1Country by Country ("CbC") Reporting and the Definition of "Related Parties"


Country by Country ("CbC") Reporting and the Definition of "Related Parties"

Question 1: My company is the Chinese ultimate parent company of our group of companies. My company does not exceed the threshold set for CbC reporting. Do I still need to complete the CbC forms, which are comprised in the set of Related Party Transaction Reporting Forms for 2016?

No. Taxpayers are not required to complete every form, merely those that are required of them. If your company does not exceed the threshold set for CbC reporting, accordingly, you are not required to complete the set of the three forms comprising the CbC report.

Question 2: My company is the Chinese ultimate parent company of our group of companies. Based on my company's consolidated financial statements, its total revenue for 2016 exceeds CNY 5.5 billion, but only after including "non-operating income". Do we still need to prepare the CbC report?

Although there is no specific guidance to date in this regard, the better view is that you are required to prepare the CbC report, i.e., the set of the three Related Party Transaction Reporting Forms that comprise the CbC report. This is because the threshold of CNY 5.5 billion is set by reference to "all categories (各类)" of income.



Question 3: My company is a Chinese subsidiary of an overseas headquartered multinational enterprise. The ultimate parent company of our multinational enterprise group will file its CbC report with its competent tax authority – will we have to provide a copy of that report to the Chinese authorities?

No. China should obtain a copy of that report directly from your parent company's competent tax authority. Otherwise, please refer to Q4.

Question 4: Are there any situations in which China may require a Chinese subsidiary of a multinational enterprise to prepare a CbC report in respect of the group?

Yes. If the ultimate parent is required under the laws of the jurisdiction in which it is located to file a CbC report, and the Chinese subsidiary is being subject to a Chinese "Special Adjustments" tax audit, China may require the Chinese subsidiary to complete the set of the three Related Party Transaction Reporting Forms that comprise the CbC report in the following situations:

The ultimate parent company did not lodge its CbC report as required;

There is no treaty in place between the jurisdiction in which ultimate parent company is located and China, enabling the CbC report filed by the ultimate parent company to be provided by the tax authority of that jurisdiction to China; or

The CbC report was not otherwise provided by the tax authority of the relevant jurisdiction to China



Question 5: My company is a Chinese subsidiary of an overseas headquartered multinational enterprise. The ultimate parent company of our multinational enterprise group is not required to file a CbC report in respect of our group because its consolidated revenue is significantly lower than the relevant threshold set by its competent tax authority for CbC reporting. Are the China tax authorities entitled to ask for the CbC report from my company if it is being (tax) audited?

Please refer to Q4. Since the ultimate parent company of your multinational enterprise group is not required by law to file the CbC report in respect of the group, the China tax authorities are not entitled to ask for any of its Chinese subsidiaries to lodge the CbC report in respect of the group.

Question 6: The CbC reporting requirement under Bulleting 42 envisions an exemption in respect of "national security". How would this exemption be applied?

We are expecting the SAT to issue guidance in the near future concerning the application of this "national security" exemption. Based on discussions to date with relevant SAT officials, it appears that the exemption is intended to be applied only in relation to the parts of a multinational enterprise's business that qualify for the "national security" exemption. The ultimate parent company of the relevant multinational enterprise will still need to lodge the CbC report in respect of the remainder of the enterprise's business. Such "partial disclosure" of an enterprise's business in the CBC report is contemplated in Bulletin 42.



Question 7: My company is the Chinese ultimate parent company of our group of companies. We enter into joint ventures, and our interest in those ventures is not consolidated into our ultimate parent company's consolidated financial statements. Do we need to include these joint ventures in the CbC report that is required to be filed under Bulletin 42?

All "Member entities", as defined in Article 5(1) of Bulletin 42, should be included in the CbC report. If those joint venture interests are not consolidated into your ultimate parent company's consolidated financial statements because the relevant stock exchange requirements do not require such consolidation, then those joint ventures do not need to be included in the CbC report. If, however, the only reason for such exclusion is "scale or materiality", then the joint ventures should nonetheless still be included in the CbC report.

Question 8: If a bank extends a loan to their customer the amount of which exceeds 50% of the capital of the customer, would the bank and its customer become "related parties" for the purposes of Bulletin 42?

No, unless the bank holds an equity interest in the customer, or vice versa, or another common party holds equity interests in both. Even in those situations, if the bank is an "independent financial institution without a controlling relationship" in respect of the customer, the bank and its customer would still not be regarded as "related parties" for the purposes of Bulletin 42. To date, no specific guidance has been issued in relation to the definition of an "independent financial institution without a controlling relationship".


Part 2Master File


Master File

Question 1: My company is a Chinese subsidiary of an overseas headquartered multinational enterprise. Based on the prescribed Master File thresholds in Bulletin 42, my company is required to prepare a Master File. May we submit, unchanged, the Master file that is lodged by our ultimate parent company with its competent tax authority, or ask the Chinese tax authorities to request that Master File from that competent tax authority through the relevant information exchange mechanism?

No. Bulletin 42 imposes the obligation on your company to prepare the "Chinese" Master File and if requested, to submit it to your company's competent tax authority. Depending on the contents of the Master File that is lodged by your ultimate parent company, its mere translation into Chinese, may suffice. However, it is more likely that you would prefer to tailor the Master File that is lodged by your ultimate parent company for use in relation to China.

Question 2: My company is a Chinese subsidiary of an overseas headquartered multinational enterprise. The laws of the jurisdiction in which our ultimate parent company is located does not require our parent company to prepare and lodge a Master File. However, my company enters into related party transactions the amounts of which exceed CNY 1 billion. Is my company required to prepare a Master File under Bulletin 42?

Yes, your company is required to prepare a "Chinese" Master File.


Master File

Question 3: My company is a Chinese "50/50 Joint Venture" between otherwise unrelated parties. My company does not exceed the "CNY 1 billion of related party transactions" threshold. Is my company required to prepare a Master File under Bulletin 42?

The threshold question is whether the results of your company are consolidated into either of the financial statements of the ultimate parent companies of the joint venture "partners". If so, and the relevant ultimate parent company has prepared a Master File, then your company is required to prepare a "Chinese" Master File under Bulletin 42.

If the results of your company are not consolidated into either of the financial statements of the ultimate parent companies of the joint venture "partners", your company is only required to prepare a "Chinese" Master File under Bulletin 42, if the amount of your related party transactions exceed CNY 1 billion.

Question 4: My company is a Chinese subsidiary of an overseas headquartered multinational enterprise. Our ultimate parent company adopts March 31 as its year end. Under the laws of the jurisdiction in which it is located, the requirement for a Master File will apply only starting with the year ending March 31, 2017. Is my company required to prepare the "Chinese" Master File under Bulletin 42 in respect of 2016?

There is no clear guidance at present in Bulletin 42 covering your situation. Assuming your parent company only prepares a Master File in respect of its year ending March 31, 2017, based on a reasonable reading of the relevant provisions of Bulletin 42, the better view is that your company is only required to prepare the "Chinese" Master File in respect of that year, i.e., year ending March 31, 2017. That file is to be ready to be provided to your competent tax authority by March 31, 2018.


Master File

Question 5: My company is a Chinese subsidiary of an overseas headquartered multinational enterprise, and is not required to prepare a Local File under Bulletin 42 because our related party transactions, although they exist, are small. Is my company still required to prepare a Chinese Master File under Bulletin 42?

Your company is required to prepare a Master File under Bulletin 42 if your parent company "has prepared (已准备)" a Master File in respect of the relevant year.

The possibility remains that companies such as yours may later be exempted from the requirement to prepare "Chinese" Master Files under Bulletin 42. For now, we would recommend that you:

• communicate with your ultimate parent company concerning the "Chinese" Master File requirement, in particular the timeline for its preparation and potential provision to Chinese tax authorities;

• monitor developments in relation to this issue, in particular clarification from the local tax authorities concerning this issue; and

• decide on the appropriate strategy for your enterprise concerning this requirement.


Master File

Question 6: My company is a Chinese subsidiary of an overseas headquartered multinational enterprise, and is required to prepare a Master File under Bulletin 42. Should the contents of that Master File be identical to those of the Master File that is lodged by our ultimate parent company with its competent tax authority?

Depending on the contents of the Master File that is lodged by your ultimate parent company, its mere translation into Chinese, may suffice. However, it is more likely that you would prefer to tailor the Master File that is lodged by your ultimate parent company for use in relation to China. Further, there may be requirements made in Bulletin 42 which are additional to those required in relation to the Master File lodged by your ultimate parent company. However, we recommend that the approach taken in relation to and the contents of both files be closely aligned.


Part 3Local File and Special Issues File


Local File and Special Issues File

Question 1: Are foreign comparables acceptable under the new China TP rules?

Bulletin 42 does not specify the selection of comparables for local documentation. In practice, if the tax authorities are convinced that no domestic comparables are available, taxpayers may use foreign comparables. However, the similarity of geographic or market conditions should still be considered.

Question 2: If a company is involved in several different types of related party transactions, should the company prepare specific benchmarking studies for each transaction in its local documentation?

Bulletin 42 does not require a separate benchmarking study for each type of related party transaction. Transfer pricing tax audit teams, when conducting audits, may separately review each of the relevant transactions. The decision concerning the extent to which benchmarking studies should be undertaken should be made based on the taxpayer's particular facts and circumstances, striking the appropriate balance between "cost" and "benefit".

We generally recommend taxpayers at least to perform a separate analysis for each of the specified groups of transactions (tangible goods, transfers of financial assets, intangibles, financial transactions, and services), which exceed the respective thresholds.



Question 3: What are the expectations of the tax authorities for the value chain analysis in the local file?

Bulletin 42 lists the contents that are required for the value chain analysis as follows:

• Details of the supply chain (transactions, physical and cash flows), and the parties responsible for key value creating activities.

• Annual financial statements for the latest fiscal year of each of the group entities involved in the value chain.

• The measurement and attribution of the value chain creation from location specific factors.

• Allocation principles and actual allocation results of group profits in the global value chain.

We anticipate that more guidance will be provided in the future by the tax authorities regarding the level of detail that is expected, as a full value chain analysis could be very extensive.



Question 4: My company is a Chinese subsidiary of an overseas headquartered multinational enterprise, and is not required to prepare a Local File under Bulletin 42 because our related party transactions, although they exist, are below the prescribed thresholds. It is still loss-making at present. Would foreign-owned enterprises with limited functions/risks and overseas related party transactions still need to prepare contemporaneous documentation?

The key question is your case is whether your company is viewed to be one "with limited functions/risks and is loss-making". If so, you are still required to prepare a Local File.

This is because Circular [2009] No. 363 is still applicable. This circular requires a loss-making foreign-owned enterprise with limited functions/risks and with overseas related party transactions to prepare and file contemporaneous documentation.

Question 5: What value of financial asset transactions should be counted for assessing the threshold of China TP documentation?

Based on a literal reading of Bulletin 42 and the 2016 version of annual RPT disclosure forms, the gross amount of a financial asset transfer shall be counted to determine the local documentation preparation threshold. However, this nominal or net amount could become ambiguous or arguable for transfers of "derivative" financial assets (e.g., swap, options, etc.). Whilst there is no detailed clarification in Bulletin 42, we recommend using the transaction agreement and the accounting treatment as the basis for determining the documentation obligations.



Question 6: Does Bulletin 42 have any special requirements in relation to payments of royalties and service fee to offshore recipients? How do the relevant provisions of Bulletin 42 interact with the provisions of Bulletin 16 concerning such outbound payments?

Bulletin 42 requires a more complete disclosure and separate analyses in respect of related party royalty and service fee transactions in the Local File.

The detailed value chain analysis now required is expected to include more a detailed and extensive disclosure in relation to royalty payments.

Insofar as services are concerned, the following information is required:

• details of the service agreements, including key contractual terms and other details;

• methodology for determining the service costs, service items, service amount, allocation standards, calculation process and results, etc; and

• details of any other comparable service agreements with third parties.

The additional information thus obtained is almost certainly going to be used by tax authorities in applying the "six tests" for deductibility that are provided for in Bulletin 16.


Contacts


Contacts

Transfer Pricing ServicesNational LeaderEastern ChinaShanghaiEunice Kuo PartnerTel: +86 21 6141 1308Email: [email protected]

Deputy National LeaderNorthern ChinaBeijingLiantang HePartnerTel: +86 10 8520 7666Email: [email protected]

Southern ChinaShenzhenVictor LiPartnerTel: +86 755 3353 8113Email: [email protected]

Western ChinaChongqingFrank Tang PartnerTel: +86 23 8823 1208Email: [email protected]

mailto:[email protected]




About Deloitte Global Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries bringing world-class capabilities, insights, and high-quality service to address clients’ most complex business challenges. To learn more about how Deloitte’s approximately 225,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn, or Twitter.

About Deloitte in Greater ChinaWe are one of the leading professional services providers with 24 offices in Beijing, Hong Kong, Shanghai, Taipei, Changsha, Chengdu, Chongqing, Dalian, Guangzhou, Hangzhou, Harbin, Hefei, Hsinchu, Jinan, Kaohsiung, Macau, Nanjing, Shenzhen, Suzhou, Taichung, Tainan, Tianjin, Wuhan and Xiamen in Greater China. We have nearly 13,500 people working on a collaborative basis to serve clients, subject to local applicable laws.

About Deloitte ChinaThe Deloitte brand first came to China in 1917 when a Deloitte office was opened in Shanghai. Now the Deloitte China network of firms, backed by the global Deloitte network, deliver a full range of audit, tax, consulting and financial advisory services to local, multinational and growth enterprise clients in China. We have considerable experience in China and have been a significant contributor to the development of China's accounting standards, taxation system and local professional accountants. To learn more about how Deloitte makes an impact that matters in the China marketplace, please connect with our Deloitte China social media platforms via www2.deloitte.com/cn/en/social-media.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively the “Deloitte Network”) is by means of this communication, rendering professional adviceor services. None of the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

© 2016. For information, contact Deloitte China.

http://www.deloitte.com/about

china related party transactions and tp documentation rules...china related party transactions and...

Documents