On 17 September, 2015, China State Administration of Taxation ("SAT") released the Discussion Draft for the Implementation Measures for Special Tax Adjustments ("Discussion Draft") to overhaul the existing trial version of the Implementation Measures, i.e., Circular 2. In the chapter of "Contemporaneous Documentation" of Discussion Draft, SAT introduces an entirely new three-tiered transfer pricing ("TP") documentation mechanism, which strengthens and clarifies the disclosure requirement on more detailed and comprehensive information about intercompany transactions and global activities of MNCs.
This significant change, incorporating Action 13 of Base Erosion and Profit Shift ("BEPS") Project launched by Organization for Economic Cooperation and Development ("OECD"), reflects SAT's requirements on the transparency of global activities of MNCs as well as her assertion of the application of contribution-remuneration matching principle on domestic entities.
Discussion Draft marks a new stage for the administration on TP contemporaneous documentation in China, and will further facilitate tax authorities to conduct comprehensive, in-depth and efficacious evaluation on TP arrangements of the enterprises. For taxpayers, it will bring higher compliance costs in preparing the documents and more exposures of being TP inquired and investigated.
In this Alert, we will introduce and analyze the new TP contemporaneous documentation mechanism. For the overall introduction of Discussion Draft, please refer to our last issue of TP alert, "Discussion Draft for the Implementation Measures for Special Tax Adjustments -- A Brand-new Epoch for Transfer Pricing Administration in China". Meanwhile, we will release more issues to discuss other key contents of Discussion Draft topic by topic. Please expect our upcoming TP alerts.
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