Meaning
Administrative rules governing transfer pricing documentation mandate a three tiered reporting structure for multinational enterprises. The sat announcement 2016 no 42 introduced the master file and the local file to the Chinese tax system. This regulation aligns local practice with the global initiatives for preventing base erosion and profit shifting.
Documentation Tier
Reporting requirements vary based on the total value of related party transactions conducted during the fiscal year. Following the sat announcement 2016 no 42, companies must identify which of the files they are obligated to prepare.
Reporting Threshold
Specific triggers determine the depth of the disclosure required from the taxpayer. The sat announcement 2016 no 42 sets a threshold of two hundred million yuan for tangible goods transfers and forty million yuan for intangible asset transfers. If a company exceeds these limits, it must complete a local file by the end of June the following year.
This file contains a detailed functional analysis and a selection of the most appropriate transfer pricing method. Tax officials use this data to identify high risk entities for future audits. Information regarding the global value chain and the allocation of intangible property must be included.
Filing Obligation
Failure to submit the required documentation on time results in significant administrative penalties and an increased audit risk. Because the sat announcement 2016 no 42 requires the disclosure of global profit distribution, the tax bureau can compare local profitability against international benchmarks. A lack of transparency leads to a formal investigation.
