Meaning
Legal compliance requirements for transfer pricing in China mandate the preparation of contemporaneous documentation for significant related-party transactions. Companies operating in the mainland must follow bulletin 2017 number 6 when reporting annual tax adjustments and disclosing the nature of their cross-border dealings. This regulation introduced a multi-tiered filing system consisting of a master file, a local file and a special file.
It governs the administrative procedures for special tax investigations and the monitoring of profit levels across different industrial sectors.
Documentation Standard
The local file must contain a detailed analysis of the value chain and the functional profile of the Chinese entity. Under bulletin 2017 number 6, the taxpayer is required to perform a benchmark study that compares its profit margins with those of independent companies.
Local Requirement
Enterprises with related-party transactions exceeding specified thresholds are obligated to submit these records by the June deadline of the following year.
Disclosure Threshold
The obligation to prepare a local file is triggered when the total amount of tangible asset transfers exceeds two hundred million yuan. For other types of transactions such as service fees or intangible asset transfers, the limit is set at forty million yuan. Strict adherence to bulletin 2017 number 6 is the primary defense against transfer pricing audits and the subsequent imposition of interest on tax underpayments.
Authorities use the submitted data to evaluate whether the pricing of goods and services follows the arm’s length principle. Proper documentation reduces the risk of the bureau making a unilateral adjustment to the reported taxable income.