Meaning
Administrative regulation issued by the State Taxation Administration provides the foundational framework for transfer pricing and thin capitalization in China. This document, officially known as circular 2009 number 2, outlines the obligations of enterprises to maintain documentation for cross border transactions with related parties. It establishes the arm’s length principle as the primary standard for evaluating whether the pricing of goods or services between associated companies deviates from market norms.
The scope of the regulation extends to include intangible asset transfers and financing arrangements.
Administration Scope
Regulatory authority rests with the provincial and local tax bureaus who monitor annual reporting forms submitted by resident enterprises. While circular 2009 number 2 has been partially superseded, its core principles continue to influence current enforcement.
Reporting Obligation
Companies exceeding specific transaction thresholds must prepare a comprehensive report detailing their functional profile and economic analysis. Because circular 2009 number 2 requires this documentation to be ready within twenty days of a formal request, maintaining active records is essential for compliance. Failure to provide these files leads to penalties and an increased likelihood of a full scale tax audit.
The burden of proof remains on the taxpayer to justify the pricing used in their transactions.
Documentation Quality
Depth and accuracy in the benchmarking study define the success of a tax filing. If the data provided under circular 2009 number 2 fails to prove the market value of the related party transactions, the authorities possess the power to make unilateral adjustments based on comparable industry data. This process often results in higher effective tax rates and additional interest charges on the deemed underpayment.
