The main concerns of the China Transfer pricing regulation is on contemporaneous documentation. Under the CIT law, this now has become legally obligation instead of voluntary action. The regulation also sets a transaction amount to level out different filing status for companies.
* Related party transaction with a annual turnover less than 20 Million RMB-exempted filing
* Related party transaction with annual turnover between RMB 20 million to 100 million – simplified documentation
* Related party transaction with annual turnover exceeding RMB100 million a year-standard documentation
Simplified documentation means that the parties concerned need to supply standard information about their organization structure, pricing policies, market conditions and profit-sharing arrangements, as well as functional analysis, related party transactions analysis, the transfer pricing method that has been adopted, comparable analysis and other factors that affect arm’s length prices and profits
Standard documentation requires many more detail, besides the standard items above, a wide range of oversea information, such as the global structure of the group, resale prices and the allocation of profits from related transaction throughout the supply chain.
New entities need to set up the oversea related company structure and have a long tern vision about this at the beginning of setting up the business
Existing entities with current related-party transaction should re-evaluate the potential risk, especial for
* Entities with recording losses, especially those with contractual relationship to related parties, such as contract manufacturers and contract services providers
* Entities whose profitability fluctuates, especially those whose profits have consistently declined in recent years
* Entities with substantially different profitability levels on third-party and related-party transactions;
* Entities that engage in transactions with domestic affiliates who have different effective tax rates.
