China Related Party Transactions and TP Documentation Rules Highlights 10 August 2016
Related Party Transactions and TP Documentation Rules Aligned with OECD recommendations and adapted for China Bulletin 42 is a significant revision and update of China s related party transactions and TP documentation rules: compliance burden for and level of transparency required of companies increased. Disclosures made in relation to global supply chains in particular, may led to China arguing for tax on a larger share of companies global profits. Formalizes response to OECD/G20 BEPS Action 13: China confirms position as a first mover. Adopts BEPS Action 13 recommendations and adapts them for China s unique economic environment and development factors. Only related party transactions and TP documentation rules contained in Circular 2 revised: other provisions of Circular 2 remain in force. Revisions of those other provisions still expected, but timing uncertain. 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 2
Contents Bulletin 42 framework 4 Ensuring compliance 12 On the horizon 15 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 3
Bulletin 42 framework 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 4
Bulletin 42 Related party transactions and TP documentation only Bulletin 42 is a significant revision and update of China s related party transactions and TP documentation rules. These new rules were issued in time for them to apply in relation to 2016. The remaining revised Special Tax Adjustments Rules are still in draft (issued September 2015). Implementation of these remaining provisions are still expected, although timing uncertain. Articles Contents Articles Contents 1 Requirements for submitting PRC Annual Related Party Transactions Reporting Forms 10 17 Framework and thresholds for contemporaneous TP documentation Master file (11 12) Local File (13 14) Special Issue File (15 17) 2 3 Definitions of related party relationships 18 22 4 Types of related party transactions 23-25 Language, and deadlines for preparation and filing Requirements to maintain records, and penalties for non-compliance 5-9 Country-by-country report filing requirements 26 27, and Appendices HK, Macau and Taiwan, and consequential amendments. Reporting forms and filing instructions. The Appendices to Bulletin 42 include the new PRC Annual Related Party Transactions Reporting Forms (2016 version) the 22 forms, along with filing instructions for the forms. 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 5
Related party forms, relationships and transactions Scope broadened, new compliance requirements introduced and existing rules refined Related party transaction reporting forms PRC Annual Related Party Transactions Reporting Forms updated, and now have 22 forms Adds new disclosures for specific types of transactions Requires disclosure of financial analysis forms in advance of filing TP documentation, requiring earlier preparation Includes the country-by-country reporting template, which is consistent with BEPS Action 13 requirements Related party relationships Existing regulations largely retained, in particular, 25% shareholding as primary test Definition broadened: one party s production and operation is dependent on another party s intangibles one party makes decisions concerning the other party s financial and operational strategies common senior management Expanded to cover situations where two parties have other substantial common interests New calculation rules for control through debt, and aggregating shareholdings of natural persons Related party transactions Retains existing transaction types, provides clarification in relation to intangibles and specifically defines financial asset transactions Transfers of financial assets such as equity to cover related party acquisitions/sales of shares specifically included Financial transactions defined to specifically include group cash pooling and guarantee fees Definition of intangible assets refined, in particular, land use rights excluded, and franchise rights and government licences included 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 6
Country-by-country report One of annual tax return forms, and aligned with BEPS Action 13 Required of Chinese tax resident enterprises: Ultimate parent of the MNC group and have consolidated revenue over RMB 5.5 billion; or Nominated as the filing entity by the multinational group Form and due date of lodgment: one of the 22 related party transaction forms to be annually lodged together with the enterprise s tax return and other applicable related party transaction forms by 31 May following the end of the relevant tax year. Contents: aligned with BEPS Action 13 Non-Chinese MNC groups: CBC reports generally requested from relevant other tax authorities through applicable information exchange mechanisms. In the event of a TP audit, provision for special situations such as gap (implementation) years, failure of ultimate parent entity to file, lack of appropriate information exchange mechanism, failure of competent tax authority to provide, etc. Provisions for such exceptions aligned with OECD recommendations. 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 7
Master, Local and Special Issues Files Separate and independently operating sets of thresholds Special Issues Files Cost Sharing Agreements Master File (part of Chinese TP documentation, OECD/G20 adapted for China ) Local File ( enhanced : detailed value chain information requested) Thin Capitalization Master File 12 months after ultimate parent year end A Chinese Master File is required if entity: has transactions with an overseas related party, and ultimate parent company has prepared a Master file; or has related party transactions worth over RMB 1 billion Contents aligned with BEPS Action 13 requirements Local File 30 June of following year Local File is required if related party transactions exceed thresholds of: purchases/sales of tangible goods of RMB 200 million; or purchases/sales of financial assets or intangible assets of RMB 100 million; or other related party transactions of RMB 40 million Required contents are effectively an enhanced local file. Including information concerning value chains (including location specific advantages and principles for allocating profit between entities), outbound investment, equity transfers, service arrangements, and APAs and rulings obtained in other countries Special Issues Files 30 June of following year Information is required for companies that have Cost Sharing Arrangements, or that exceed the applicable thin capitalization thresholds The content of the required reports is nearly identical to the existing requirements in Circular 2. 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 8
Chinese Master File Likely required if ultimate parent company prepares a Master file Chinese Master File may be required, even though entity is not required to prepare Local File: requires change in compliance approach Information required for the Chinese Master File consistent with the BEPS Action 13 requirements Chinese requirements may differ from the MNC home jurisdiction requirements, depending on how closely that home jurisdiction follows OECD requirements. In theory, the Chinese Master File may be a mere translation of the Master File prepared by the ultimate parent company; however, we expect multinational company groups to tailor the latter for submission. In tailoring the ultimate parent company s Master File, need to consider strategy in relation to sensitive information, description of potentially controversial structures, such as central entrepreneur, IP and marketing services structures, and the use of particular terms that attract undue attention by Chinese tax authorities, such as management fees. 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 9
Local File Significant increase in disclosure requirements Local File not required merely because Chinese Master or Special Issues Files required; threshold for Local File independently applicable. Significant expansion of information requirements, compared to Circular 2. Key changes for inbound MNCs include: Value chain analysis: Taxpayers asked for extensive details (including financial statements) for entities in the value chain, and the allocation principles and actual group profits through the value chain. Contribution of location specific advantages must be addressed. Obtaining detailed information may be very difficult for some groups. The required level of information is unknown, and so care will be needed to present appropriate levels of detail at first. Related party equity transfers: Taxpayers asked for information about the acquisition or disposal of equity interests in related parties, including details of the transfer and the target entity, as well as valuation and due diligence reports. Taxpayers will need to take care to account for any gains on disposal of direct or indirect equity holdings. Related party services: Comprehensive overview of the service arrangements required, including the benefits for each party to the transaction and methodology for calculating the service fees. Taxpayers will also need to consider how to disclose complex service fees arrangements, and how to support the Bulletin 16 requirements for service fees (i.e. the six tests ) 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 10
Special Issues Files Existing compliance requirements fine tuned Cost Sharing Agreements: taxpayer participating in CSA Copies of agreement, details of how CSA is intended to operate, and evidence of adherence thereto to be included Ready for submission by 30 June of following year Thin Capitalization: non-financial institutions with debt-to-equity ratios above 2:1, and financial institutions with ratios above 5:1 Demonstrate that the level of debt and applicable interest rates are arm s length Ready for submission by 30 June of following year 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 11
Ensuring compliance 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 12
Ensuring compliance Maintain perspective, achieve balance, manage resources and leverage technology Balance Balance manageable disclosure and meeting the requirements? Perspective Strategically manage from group transfer pricing perspective, not merely focus on local subsidiary compliance and reporting Resources Recognize and work with stakeholders outside tax, and coordinate between inhouse and external advisors Approach Balance digital and manual processes, and deal with multiple deadlines across jurisdictions. Leverage technology. 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 13
Recommended approach No longer business as usual, reset and rethink start now! Self-assessment Gap analysis Formulate strategy Start now! Understand new requirements, within the particular context of affected Chinese entities and the multinational company group Establish the gap between existing documentation and availability of information, and the new disclosure requirements Make decisions concerning information collection, appoint appropriate teams, and determine how to prepare documentation Centrally consider how to ensure consistency and accuracy of information, and alignment with CBC report Plan for dealing with risks arising from increased disclosure Get report preparation underway early: most qualitative analyses can be completed before year end 2016 is new base year for enhanced disclosure requirements: if wish to make change to business models and transaction structures, do so before end of the year 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 14
On the horizon 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 15
On the horizon Further significant China SAT and OECD developments expected Remaining revision of Special Tax Adjustments Rules: discussion draft issued September 2015. Implementation of remaining provisions thereof still expected, although timing uncertain. OECD work on profit splits (Actions 8-10): OECD s Discussion Draft on Revised Guidance on Profit Splits released July 4. Not yet a consensus document. Issued to facilitate discussion and obtain public comments. Comments due early September, and consultation to take place in October. China s position on permanent establishments and attribution of profits thereto (BEPS Actions 7): SAT still studying issues in relation to PEs in particular, the attribution of profits thereto, in particular, the use of deemed profits basis for such profit attribution. No definitive conclusion yet reached. Likelihood of formal SAT issuing guidance concerning these issues in 2016 is "low". 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 16
TP audits in China Observations from our recent cases SAT internal reorganization: New team, Division 3, set up to conduct national TP audits (local TP audits, still carried out by local tax authorities, with SAT approval). Potentially more SAT driven national TP audits of selected industries and as follow up from additional disclosures in TP documentation. Existing Division 1 and Division 2 groups have new responsibilities: organizing the expert panel reviews of cases, and conducting APA negotiations respectively. These teams were previously geographically focused, rather than being issues focused. Expert panels reviewing cases of significance : SAT using expert panels made up of five tax officials apparently randomly selected from a pool of 50. Panels review proposed adjustments and may return cases for further consideration by local tax bureaus. Decisions of panels are required to be unanimous. Previously, expert panels appeared to focus on adjustments of tax payable of over RMB 50 million. Recent experience indicates a lower threshold, perhaps RMB 10 million, with a higher priority for: Non-trade related party payments Settlements that appear to merely adjust an entity s overall profitability (TNMM) Implications for formal TP audits: Expert panels appear now to be taking a more analytically rigorous approach in their review of disputed cases, rather than accepting settlements based on the entity s overall profitability. As a consequence, formal audits are likely to take longer to conclude. A work around considered by taxpayers is to agree selfassessed adjustments with local tax bureaus, without a formal TP audit being conducted. Although taxpayers may consider this option to avoid delays associated with formal TP audits, they should note that voluntary self-assessed adjustments are not subject to MAP. 2016. For information, contact Deloitte China. China Related Party Transactions and TP Documentation Rules 17
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