China introduces new transfer pricing documentation rules to implement BEPS country-by-country reporting

HONG KONG – China’s State Administration of Taxation (SAT) has finally released its long-awaited Bulletin 42 to revise transfer pricing documentation requirements. The effect of the Bulletin is retrospective to January 1, 2016. In a Client Alert, lawyers Baker & McKenzie say Bulletin 42 will have a far-reaching impact on taxpayers.

The law firm says any MNC engaged in a cross-border, related-party transaction in China can expect to be significantly affected by the transfer pricing documentation requirements of Bulletin 42, which applies key recommendations under Action Plan 13 of China’s Base Erosion and Profit Shifting (BEPS) Project.
But it says MNCs engaged in purely domestic related-party transactions are expressly excluded from the requirements.
Bulletin 42 requires MNCs to prepare transfer pricing documentation for related-party transactions occurring in or after 2016. Non-compliance may lead to a punitive interest penalty equal to the RMB loan benchmark rate published by the People’s Bank of China plus 5 percentage points if and when PRC tax authorities make a final transfer pricing adjustment.
B&M says that, coupled with increasing scrutiny by Chinese tax authorities of cross-border related-party transactions in a post-BEPS environment, every MNC should consider the following actions to safeguard its tax interests –

• Invest in human resources and accounting systems to comply with new transfer pricing documentation requirements;
• Review and assess existing legal structures and the economic substance of income receiving entities to determine whether these arrangements are defensible;
• Manage the tax risks from BEPS by obtaining certainty through APAs where appropriate; and
• Prepare to challenge tax authority decisions through administrative review processes, litigation, mutual agreement procedures or other procedures when a sound legal basis exists and it is commercially necessary and feasible to do so.

Further information from Baker & McKenzie offices in Beijing, Shanghai, Hong Kong or New York.  www.bakermckenzie.com (ATI).