Meaning
This directive functions as an administrative instrument issued by the State Taxation Administration to regulate the filing requirements for taxpayers conducting cross-border transactions. Announcement 2020 No 35 defines the specific procedures for submitting transfer pricing documentation in China. It mandates that resident enterprises prepare and maintain contemporaneous documentation if they engage in related-party transactions exceeding specified monetary thresholds or criteria.
Compliance with these rules determines whether a taxpayer faces an automatic audit or receives a waiver from standard transfer pricing scrutiny. The document applies to all enterprises liable for corporate income tax under the national jurisdiction.
Reporting Requirement
Entities falling under the jurisdiction of this mandate must submit an annual report on related-party transactions as a supplement to the yearly corporate income tax return. This mechanism ensures that the tax authority maintains visibility over profit shifting and base erosion risks associated with multinational corporate structures. Filing takes place through the integrated electronic tax system where taxpayers classify their intercompany dealings by type, including the sale of tangible goods, the licensing of intangible assets, and the provision of financial services.
Failure to submit the report or the provision of inaccurate data triggers penalty assessments based on the underlying tax liability and the duration of the delay.
Documentation Hierarchy
Three distinct levels of records support the tax base verification process for entities managing substantial volumes of cross-border trade. The master file provides a high-level overview of the entire global business operations, including the corporate structure and the location of key intangible assets. A local file contains the granular analysis of specific transactions between the Chinese entity and its foreign affiliates, comparing the pricing against market norms for identical or similar operations.
The special issue file addresses complex arrangements like cost sharing agreements or thin capitalization scenarios that exceed standard risk profiles.
Compliance Limit
Enforcement practice distinguishes between entities that qualify for exemptions based on simplified reporting status and those that must prepare a full set of files. Companies that do not exceed the annual transaction value limits specified in the announcement or that maintain a single-type related party transaction pattern often qualify for reduced disclosure burdens. Even when an entity qualifies for an exemption, the tax authority retains the power to request additional data if the reported profit margins diverge significantly from the industry average.
Taxpayers must retain these documents for a minimum period of ten years to provide evidence during a subsequent inspection. Proper application of these protocols prevents the arbitrary adjustment of taxable income by the local tax bureaus.
