What kind of documents need to be submitted under China's transfer pricing regime when enterprises file their annual income tax returns?
The principal documents are as follows:
(i) The group organizational structure;
(ii) The nature of the taxpayer's business, and the industry and market conditions;
(iii) The controlled transactions, including identification of relevant data and inter-company agreements;
(iv) The assumptions, business strategies, and transfer pricing policies, including information regarding factors that influenced price-setting;
(v) An analysis of functions, risks, and tangible and intangible assets;
(vi) The selection of the transfer pricing method;
(vii) The application of the transfer pricing method including comparability analysis; and
(viii) The conclusions on the arm's length nature of the inter-company transactions.
The supplementary documents are as follows:
(i) Original entry books and transaction records;
(ii) Pricing documents such as invoices and shipping documents and inter-company correspondence;
(iii) Analysis of special factors that have directly or indirectly impacted the inter-company pricing, such as an explanation of any continuous losses for a period of time, market entry strategies and set-off transactions.
Q2. Under what circumstances will the tax authorities make transfer pricing adjustments?
(i) The cumulative amount of related-party transactions exceeds RMB100,000;
(ii) The estimated retrospective adjustments exceed RMB500,000;
(iii) A taxpayer has failed to comply with the related-party disclosure requirements in its annual return for previous years, or if, upon further audit investigation, a taxpayer is found to have provided incorrect information on its pricing and costs in relation to the related party transactions; and
(iv) A taxpayer has previously had transactions with related parties in tax-haven countries.
Q3. What kind of enterprises are most likely to expose themselves to transfer pricing investigation by the tax authorities for non-compliance?
(i) The production and operation decisions are controlled by related parties;
(ii) Amounts of the controlled transactions with related parties are significant;
(iii) Continuing losses for more than two consecutive years;
(iv) Fluctuating profits, i.e. profits and losses in alternate years;
(v) Profit margins lower than the industrial average or group average;
(vi) Payment of unreasonable fees to related parties; and
(vii) Sudden drop in profits after the expiration of a tax holiday period.
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