Transfer Pricing Compliance in China: Preventing Disputes is Key

China’s colossal economy and its predominant role within the global market result in the emergence of an increasing interest towards China’s transfer pricing regime. Since China is not a member of the OECD, any transfer pricing endeavor goes far beyond the classic transfer pricing practices, though.

More precisely, China’s legal framework comprises a part of OECD Transfer Pricing Guidelines and a part of autonomous rules. Therefore, transfer pricing approaches in China necessitate extra study and expertise into the realm of transfer pricing.

Chinese tax authorities have used their own interpretation regarding several aspects and requirements relating to transfer pricing. The general impression considers that e.g. the sheer size of the Chinese market, the vast array of workers and production opportunities should provide more functions to the Chinese entity and therefore more profit count for the local enterprise. This insight – among others – is crucial for a company’s transfer pricing compliance.

Industry experts deem that the transfer pricing policies will soon be extended to medium-sized companies.

While this article aims at providing a first look into those who are potentially affected by the Transfer Pricing Regulations, it is imperative that a case-by-case analysis be conducted by upon request. Given that there are only narrow levels of tax appeal in China, most taxpayers would rather prefer to avoid a tax dispute. Preventive action seems to be the key.

A quick insight

For the purposes of a quick briefing on the issue, an insight on Bulletin 42 [“Bulletin Gonggao 2016”] released by the tax authority is necessary. This Bulletin constitutes the last ruling of China transfer pricing compliance requirements.

Under the Bulletin, any company that engages in a cross-border controlled transaction involving China, shall comply with the transfer pricing legislation. So, there are definite criteria to determine a “related party.” Indicatively, we talk about a related-party transaction when:

  • A share control is affirmed (direct, i.e. owning 25 percent or more of the shares of the other enterprise or indirect, i.e. a third party directly or indirectly owns 25 percent or more of the shares of both). Shares belonging to shareholders who are relatives to each other, are accumulated for the purposes of this test;
  • More than half of the board members or senior management of one enterprise are appointed or delegated by the other enterprise or such personnel of one enterprise simultaneously act as board members or senior management of the other enterprise or such personnel of both enterprises are appointed by a third party;
  • A catch-all provision also provides for a related-party relationship “when the two parties have other common interests in substance.”

One could possibly fall into the scope of transfer pricing legislation even seemingly “compliance-free.” Therefore, the need for expert advice, even when in doubt, is extremely important.

Transfer pricing compliance

Once a taxpayer falls within the scope of the transfer pricing legislation, the next step is to make certain to have complied with the transfer pricing rules. China’s transfer pricing legal framework adopts the following documentation structure.

Country-by-country report

Multinational enterprises (MNEs) report annually (for each tax jurisdiction in which they do business) some crucial information such as information on their global allocation of profit, taxes paid, borrowings, employees, and certain indicators of economic activity among the countries in which they operate.

Moreover, a country-by-country (CbC) report is required if a Chinese resident company is the ultimate holding company of the group and the consolidated revenue is over RMB5.5bn.

The same requirement is effective if the company is the “reporting entity” of the MNE Group. Taxpayers should state in the “master file” which entity within the MNE Group should prepare and file the CbC report.

The affected entities must prepare and submit the CbC report by May 31 of the year following the financial year.

In addition, the disclosure of segmented financial results from overseas and domestic related-party transaction is required (by submitting annual reporting forms).

“Master” and “local” files

A “master file,” providing an overall description of the MNE’s global business is required. Bulletin 42 requests more detailed information than stipulated under base erosion and profit shifting (BEPS) Action 13 (such as details on industrial structure adjustments, and information on the main functions, risks, assets, and personnel of the MNE Group’s major R&D facilities).

RMB1bn constitutes the lower threshold for the annual related-party transactions.

Alternatively, the tax authority examines if the ultimate holding company of the MNE Group has prepared a “master file.”

A “local file” contains the calculation process of the service fee and a detailed benefit test from the service recipient perspective. Each Chinese subsidiary (or permanent establishment) that has related-party transactions in excess of certain thresholds has to prepare and maintain a “local file.” The threshold is met when:

  • The tangible asset transfers exceed RMB200m;
  • The financial asset transfers exceed RMB100m and the intangible asset transfers exceed RMB100m; or
  • The aggregate amount of other related-party transactions exceeds RMB40m (including service transactions, intangibles licensing, tangible property rentals, and interest on loans).

A “special issue file,” must be filed by taxpayers who enter into cost sharing arrangements or fall under thin capitalisation rules.


Taxpayers must complete the “local” and “special issue” files by June 30 for controlled transactions executed during the previous year.Taxpayers must prepare the “master file” within 12 months after the end of the reporting year of the MNE Group’s ultimate holding company. Taxpayers should submit a transfer pricing report within 30 days when requested by the tax authority.As is the case globally, the arm’s length principle serves as the cornerstone for China’s transfer pricing regime. The tax authority seems open to other transfer pricing methods, in addition to the already accepted OECD methods.

Penalties for non-compliance

Taxpayers affected by the transfer pricing regulations should prepare and – upon request – submit contemporaneous documentation for each tax year. To meet these requirements, the taxpayer must provide it to the tax authority within 30 days upon request.

If an enterprise fails to provide contemporaneous documentation, the tax authority may impose penalties (including fines between RMB2,000-10,000). The tax auditors “deem” taxable income based on their own calculations without the need to rely on specified transfer pricing methodologies.

The significance of advance pricing agreements and how we may assist

Advance pricing agreements (APAs) are available in China under some conditions.

We can assist you in preparing and applying for APAs during and after negotiation and agreement with the tax authorities.

For example, we can assist you in selecting appropriate transfer pricing methodologies and critical assumptions; preparing supporting documentation for the APA application; negotiating with the tax authorities, and preparing annual reports during the APA’s implementation period.

In broad terms, complying with transfer pricing regulations in China could emerge with the preparation of a preliminary study. This study contributes to assess the intra-group margins in the provision of products or services. So, a competent transfer pricing analyst may use benchmarking data from reliable databases to facilitate managerial decisions.

Due to the local-favored transfer pricing legislation in China, outbound payments from the local entity are generally not deductible. In any case the tax authority deeply scrutinizes payments that include management fees, interest, technical consulting, and royalties.

Even if these services are not overpriced, the companies shall conduct a special full transfer pricing study. This documentation assists to assure transfer pricing compliance, mitigate potential risks, and avoid unwanted implications.

Going forward

As an effort to tackle tax base erosion and profit shifting, China’s tax authority is focusing increasingly on transfer pricing administration.

In this context, the tax authority enforces stringent local-flavored transfer pricing regulations, imposes detailed compliance requirements, and increases scrutiny on related-party transactions.

Even the slightest differentiation from the general guidelines – like those of OECD – necessitate considerable attention to the detail. So the final result will be impeccable and in line with the “sui generis” Chinese rules.

From the question whether a company falls into the scope of transfer pricing rules and a full transfer pricing study, until the preparation for an APA, peculiarities of the Chinese transfer pricing legal framework render the provision of specialized transfer pricing services absolutely necessary.

The authors are senior tax advisors and partners of Transfer Pricing Experts’ hub in Cyprus. To contact the authors for a Mandatory Full Transfer Pricing study or a Voluntary Preliminary Study or Benchmarking Data, please visit or email to