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TAX NEWS - FEBRuary 2010

China's tax authorities calling for TP contemporaneous documentation reports

The Shenzhen State Tax Bureau has recently issued a circular (ShenGuoShuiHan [2010] No.11 , Circular 11) dated 13 January 2022 to the tax bureaus at district levels that addresses the collection and management of transfer pricing contemporaneous documentation reports. The circular provides evidence of the Chinese tax authorities' determination to tighten transfer pricing compliance enforcement.


Highlights of Circular 11

Circular 11 sets out the administrative requirements for contemporaneous documentation report collection and reporting.

Key points are as follows:

- All enterprises with sales over RMB 100 million must submit a Year 2008 Contemporaneous Documentation Report, in both paper and electronic formats, before March 20, 2010, to the in-charge tax bureau.

- In-charge tax bureaus should maintain separate files for each enterprise, and the files should be administered centrally.

- Enterprises that meet the exemption criteria set out in GuoShuiFa[2009]No.2 (Circular 2), Implementation Regulations for Special Tax Adjustments, are required to provide written explanation to the in-charge tax bureau for the record.

- The in-charge tax bureau will impose penalties on enterprises that refuse to provide the Contemporaneous Documentation Report in accordance with Article 106 of Circular 2. The relevant penalty is a fine of up to RMB 50,000, and the tax bureau has the right to assess taxable income to the enterprise in accordance with "reasonable" deemed methods.

- The above administrative measures will be applicable from 2008 and onwards.


Insights of Circular 11

TP audit exposure -
As set out in Circular 2, the threshold for Contemporaneous Documentation Report preparation was set at RMB 200 million in related-party buy-sell transactions. However, under Circular 11, tax bureaus are requesting Contemporaneous Documentation Reports from enterprises with sales over RMB 100 million, and this is the only one condition to be considered.

Clearly, the tax authorities are trying to strengthen the transfer pricing administration efforts and Circular 2 would be strictly implemented. More important, it is very likely that the tax authorities would compile the collected information for transfer pricing audit target selection.

In view of the above, the value of a transfer pricing contemporaneous documentation report is not merely to comply with the regulation, but also to relieve taxpayers, to a large extent, from the significant burden to the enterprise in the event of an audit and sudden requests for information from the tax bureaus within a short period of time.

Use of non-public information - As stated in Circular 11, all district-level tax bureaus have to complete and submit a form detailing the transfer pricing contemporaneous documentation report collection results by April 1, 2010, for year 2008 and by July 1 for the following years. It is expected that the information collected will be reviewed and analyzed centrally, and may further be used as benchmarking data.

With reference to Circular 2, the tax authorities may use public as well as nonpublic information when making transfer pricing assessments. In principle, if a taxpayer's profitability is lower than the median of the interquartile range established by comparable companies, the tax bureau should adjust the taxpayer's profitability to at least the median of the range. The nonpublic information very likely includes the information collected from this exercise. As a result, tax authorities may leverage this nonpublic comprehensive database to identify transfer pricing audit targets and, maybe even more aggressively, they may apply the nonpublic industry results to transfer pricing audit adjustments.


Concluding comments

In addition to Shenzhen, tax bureaus in southern China regions took similar actions in calling for TP contemporaneous documentation reports from selected taxpayers. For example,

- The Tax Bureau in Shanghai Wai Gao Qiao (No 4 Branch) issued a notice on January 28 that requires companies meeting the relevant documentation requirement to submit the 2008 TP documentation report to the in-charge tax bureau starting from the date of the notice; if the company fails to submit, it will be subject to the penalty as stipulated in the PRC Tax Collection and Administration Law.

- Shangdong State Tax Bureau - (1) For companies meeting the requirement of Circular No. 2, the 2008 transfer pricing documentation should be prepared and submitted to the tax bureau by 1 January 2010; (2) documentation for 2009 and subsequent years should be prepared and submitted to the tax bureau by June 1 of the following year; (3) for those companies under the follow-up supervising period, documentation should be prepared and submitted to the tax bureau by June 20 of the following year; (4) for companies meeting the requirements of Guo Shui Han [2009] No. 363, documentation should be prepared by June 20 of the following year.

- State Tax Bureau in Tianjin Economic and Technology Development Zone - (1) For companies meeting the requirement of Circular No. 2 (including those under the follow-up supervising period), 2008 documentation should be prepared by December 31, 2009, and submitted to the tax bureau by 31 March 2010; (2) for companies meeting the requirements of Circular No. 2 (including those under the follow-up supervising period), the 2009 documentation should be prepared by May 31, 2010, and submitted to the tax bureau by 20 June 2010;

- Guangzhou State Tax Bureau - (1) For companies meeting the requirements of Circular No. 2, the 2008 documentation should be prepared by December 31, 2009, and submitted within 20 days upon request; companies with limited functions and risks under the follow-up supervising period are required to submit the documentation by December 31, 2009; (2) for companies that meet the requirements of Circular No. 2, the 2009 documentation should be prepared by May 31, 2022 and submitted within 20 days upon request; companies with limited functions and risks under the follow up supervising period are required to submit the documentation by June 20, 2010; (3) for companies that meet the requirements of Guo Shui Han [2009] No. 363, the documentation should be prepared and submitted by December 31, 2009, regardless of whether they exceed the minimum threshold.

- The Shenzhen State Tax Bureau requested that all companies with sales over RMB 100 million to submit 2008 documentation (in hard copy and soft copy) by March 20, 2010. Documentation for 2009 and subsequent years should be prepared and submitted to the tax bureau by June 20 of the following year.

Mr. Peng Ning from the State Administration of Taxation's International Taxation Division has stated that Circular 363 should be implemented consistently with Circular 2. Regardless of whether taxpayers exceed the minimum threshold for documentation requirements under Circular No. 2 or not, they are required to prepare and submit the contemporaneous by June 20 of the following year when the company incurs losses. 2008 documentation is due by December 31, 2009.

It is worth noting that any noncompliance with the Chinese transfer pricing regulations would result in penalties, adjustment of taxable income, penalty interest, and increased scrutiny from the tax authorities.

Taxpayers should pay attention to their related-party transactions arrangement, take a proactive approach to review their transfer pricing methods, and prepare relevant contemporaneous documentation based on Circular 2 so as to minimize their transfer pricing exposure.
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