The Chinese Tax Bureau promulgated on 6 July 2009 the circular number 363 on reinforcing control and investigation of transactions between affiliates.
According to the circular, companies that have been established in China by a multinational company that have limited functions and take limited risks (for example, a production company, distribution company or research company) must maintain a reasonable level of profit.
Therefore, if during a tax year, such a company bears losses, it must prepare documentation on transfer pricing and submit it to the competent tax authorities by 20 June of the following year.
The circular aims to maintain high levels of tax revenue in China despite the financial crisis (by restricting attempts of multinational companies to make their Chinese subsidiaries bear all losses incurred abroad).
Some provisions of the circular introduce differences to the measures relating to transfer pricing that were promulgated by the Chinese Tax Bureau a few months earlier (8 January 2009).
For example, according to the measures, if sale and purchase transactions between affiliated companies amount to less than RMB 200 million, or if the amount of transactions (not related to sales and purchase) is less than RMB 40 million RMB, the Chinese company should not prepare documentation on transfer pricing.
However, according to the circular, if a company that has limited functions and takes limited risks bears losses during a tax year, it must prepare documentation on transfer pricing regardless of the value of transactions fulfilled.
According to the measures, if the tax authorities begin investigations on a company that has no obligation to prepare documentation on transfer pricing, the said company has 60 days to prepare and submit documents proving that transactions have been fulfilled at arm's length. In that case, only the documents that are linked with the investigation shall be submitted.
However, pursuant to the circular, in case an investigation is made in a company, such company must provide a complete documentation on transfer pricing, which means full disclosure of transactions between the company and its affiliates.
Finally, if a company that has limited functions and takes limited risks bears losses, it must submit documentation on transfer pricing by 20 June of the following tax year. The company therefore only has six months to prepare documentation (as opposed to the period required by one year the Measures). This imposes a heavy burden on companies, which must also prepare an annual report between January and May.
Some rules created by the Measures are being reinforced by the circular. On the other hand, some principles are being altered, which has triggered criticisms given that the original principles included in the measures were only issued at the beginning of the year.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 10/09/2009.
