Meaning
Administrative circulars issued by the State Taxation Administration establish the regulatory framework for transfer pricing and cross-border transactions in China. Specifically, Bulletin 2015 Number 16 governs the tax treatment of outbound payments for services and intangibles made to foreign related parties. This document prevents local entities from eroding the Chinese tax base through artificial service fees.
Transfer Pricing
Taxpayers must prove that payments to foreign affiliates correspond to actual services rendered. In this context, Bulletin 2015 Number 16 mandates that any payments must align with the arm’s length principle. It gives tax bureaus the power to adjust transactions that lack commercial substance.
Method Selection
Tax authorities evaluate the pricing method used to determine the service fees. When applying Bulletin 2015 Number 16, the chosen transfer pricing method must reflect the economic value added by each party. Companies often use the transactional net margin method or the comparable uncontrolled price method.
Reporting Mandate
Chinese enterprises must submit detailed documentation of their service transactions during the annual tax filing process. This reporting mandate under Bulletin 2015 Number 16 requires proof that the overseas parent provides actual benefits to the Chinese subsidiary. The documentation must include service agreements and timesheets of foreign personnel.
If the taxpayer fails to provide this evidence, the tax bureau disallows the deduction of the service fees, resulting in a direct increase in the taxable income of the domestic entity.
