Structuring Contemporaneous Documentation for Offshore Parent Service Remittance Tax Clearances
Structure contemporaneous evidence logs showing direct operational benefits to satisfy tax bureau reviews and clear offshore parent service remittances.
SAT Bulletin 2016 No 42
Meaning
Regulatory announcements issued by the State Taxation Administration clarify the requirements for annual reporting of related party transactions and the preparation of contemporaneous transfer pricing files. This sat bulletin 2016 no 42 introduced a new three tier structure for documentation consisting of the master file, the local file and the special issue file. It aligns the chinese transfer pricing regulations with the international standards developed by the organization for economic cooperation and development.
The rule applies to any enterprise in china that has transactions with associated companies that exceed specified monetary thresholds. Compliance with this bulletin is necessary for avoiding the penalties associated with the failure to disclose related party dealings.
Tiered Documentation
Requirements for the preparation of the master file under sat bulletin 2016 no 42 apply to groups that have significant cross border transactions or a large global presence. This document provides a high level overview of the global business operations, the supply chain and the allocation of intangibles across the entire group. The local file focuses on the specific activities of the chinese entity and includes a detailed functional analysis and a benchmarking study for its intra group transactions.
Special issue files are required for certain high risk activities such as cost sharing agreements or the use of thin capitalization. This tiered approach allows the tax authorities to understand the global context of the local business and identify potential areas of profit shifting. Each file has its own submission deadline and must be updated annually to reflect the current state of the business.
Reporting Threshold
Applicability of the local file requirement depends on the total value of the related party transactions conducted by the enterprise during the tax year. For the purchase and sale of goods, sat bulletin 2016 no 42 sets a threshold of two hundred million renminbi. Other types of transactions like the provision of services, the transfer of intangibles or financial dealings have a lower threshold of forty million renminbi.
Companies that fall below these limits are still required to report their related party transactions in their annual tax return but do not need to prepare the full contemporaneous documentation. This risk based approach focuses the attention of the tax bureau on the larger players while reducing the administrative burden on small and medium enterprises. It is important for finance managers to monitor their transaction volumes throughout the year to ensure they are prepared for the filing requirements.
Compliance Enforcement
Submission of the annual reporting forms for related party transactions is mandatory and must be completed by the end of may following the tax year. While the local file and master file are not submitted with the return, they must be ready for inspection within thirty days of a request from the tax authorities. Sat bulletin 2016 no 42 specifies that failure to provide the documents on time can lead to a formal transfer pricing audit and the potential for severe adjustments.
The tax bureau uses the information in these files to assess the risk profile of the company and decide where to allocate its investigation resources. Maintaining a high quality file that follows the specific format and content requirements of the bulletin is the best defense against a tax adjustment. The documentation must be provided in chinese and should clearly demonstrate that the pricing of the transactions meets the arm’s length principle.
Strategic management of this compliance task helps to minimize the tax risks associated with multinational operations in china.