| Overview |
| 1. |
When you file your Enterprise Income Tax Return for the year ended 31 December 2008, please do not forget to include the additional 9 Forms which must be submitted together with the annual Income Tax Return on or before 31 May 2009. |
| 2. |
The additional 9 Forms are to report on all of your related party transactions and transfer pricing policies, especially those cross-border transactions involving overseas companies. If your annual related party transactions are substantial, you may further be required to compile a detailed contemporaneous documentation on the transfer pricing policies. |
| 3. |
The Chinese Tax Authorities are serious about enforcing these new reporting requirements to combat shifting profits to overseas companies through transfer pricing. If you do not submit the 9 Forms or fail to compile the contemporaneous documentation on related party transactions, you are likely to be selected by the tax bureaus for a transfer-pricing audit which may result in fines and penalties if your transfer pricing method is not acceptable. Moreover, the transfer-pricing audit can be carried out retrospectively for 10 years. |
| 4. |
Taxpayers, especially foreign invested enterprises, are advised to review their transfer pricing policies for the past 10 years and take immediate remedial actions and act with prudence in relation to the disclosure of related party transactions, since transfer-pricing audits have far reaching effect as in the case of the Labour Contract Law that became effective last year. |
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| Introduction |
| 1. |
The State Administration of Taxation in China issued the Implementation Rules for Special Tax Adjustments (特別納稅調整實施辦法〔試行〕) 國稅發〔2009〕2 號 on 8 January 2009, requiring all PRC enterprises to report on their related party transactions in a set of 9 Forms commencing 2009. |
| 2. |
The 9 Forms are in addition to the annual Enterprise Income Tax Return, and must be submitted to the tax bureau on or before 31 May every year. |
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| The Annual Tax Reporting Forms |
| The Annual Tax Reporting Forms consist of the Enterprise Income Tax Return and the following newly introduced 9 Forms: |
| 1. |
Related Party Relationships |
| 2. |
Summary of Related Party Transactions |
| 3. |
Purchases and Sales |
| 4. |
Labour Services |
| 5. |
Transfer of Intangible Assets |
| 6. |
Transfer of Fixed Assets |
| 7. |
Financing |
| 8. |
Foreign Investment Status |
| 9. |
Foreign Payments |
| A special feature is that the taxpayers are required to disclose their transfer pricing methods in the 9 Forms. The Implementation Rules specify five usually acceptable methods, namely Comparable Uncontrolled Price Method, the Resale Price Method, the Cost Plus Method, the Transactional Net Margin Method and the Profit Split Method. Taxpayers are advised to adopt one of the acceptable methods in their transfer pricing policies. |
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| Purpose of the 9 Forms |
The 9 Forms are to enable the tax bureaus to select targets for conducting transfer-pricing audits so as to combat tax avoidance by taxpayers shifting their profits to their related overseas companies. |
| Taxpayers whose transfer pricing methods are none of the above and whose profits level appears to be below average, are likely to be selected for auditing. There will be interest charges and even fines on any tax adjustments as a result of the audit. |
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| Requirement for preparing Contemporaneous Transfer Pricing Documentation |
| In addition to submitting the 9 Reporting Forms, taxpayers are required to prepare contemporaneous documentation on their related party transactions if their values reach the following thresholds: |
| 1. |
Annual related party purchases and sales reach RMB200 million. |
| 2. |
Other related party transactions e.g. payment of royalty, interest etc. reach RMB40 million. |
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| Note |
Foreign shareholding in a PRC enterprise of less than 50% and the enterprise only transacts with domestic PRC related entities are exempt from preparing contemporaneous documentation.
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| Contemporaneous documentation requirements are much more detailed than the 9 Forms, with 5 categories and 26 sub-categories of information to be furnished. Among other things, you have to compile a comparable analysis comparing your gross profit margin with that of an unrelated company and to explain for discrepancy, if any. |
| The date for completing the contemporaneous documentation will also be 31 May and must be submitted within 20 days upon a request from the tax bureau. Since 2009 is the first year for taxpayers to prepare this documentation, the State Administration of Taxation has extended the deadline to 31 December 2009 for compliance. |
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| Definition of Related Parties |
| 1. |
Direct or indirect shareholding or ownership of 25% or above. |
| 2. |
Without shareholding or ownership relationship, but one entity has significant control over the management of another entity. |
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| Summary |
| 1. |
The State Administration of Taxation is really serious about enforcing the transfer pricing compliance requirements. Related party transactions involving cross-border entities or overseas companies, such as processing plants set up in China by Hong Kong enterprises, are the main targets of this exercise. |
| 2. |
It is also important to note that any transfer pricing audit is not simply for the current year, but including previous years up to a maximum of 10 years. |
| 3. |
Taxpayers, especially foreign invested enterprises, who used to maintain a low profit margin through transfer pricing with their related foreign entities have to pay special attention to these new requirements and take immediate remedial actions. Transfer pricing audits have far reaching effect as in the case of the Labour Contract Law. |
For further information, please contact Mr. Albert Cheung at +852 2894 6830 or albert@ccifcpa.com.hk. |
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