Homing in on transfer pricing

The State Administration of Taxation (SAT) of China released Guoshuifa (2009) No. 2, the final version of the Implementation Measures for Special Tax Adjustments (Circular 2) on January 9 2009. It explained how taxpayers should comply with and how tax administrators should enforce the provisions found in Chapter 6 of the Special Tax Adjustments section of the 2008-promulgated PRC Enterprise Income Tax Law (中华人民共和国企业所得税法). It provided a new basis for the tax administrators to make special tax adjustments related to areas such as transfer pricing, thin capitalisation, general anti-avoidance rules and controlled foreign corporations, advanced pricing arrangements, and cost sharing agreements.

A large focus of Circular 2 has been transfer pricing. In the past, it was not mandatory for companies to prepare transfer pricing documentation in China for compliance purposes. In an effort to take a step closer to international standards, the SAT introduced a comprehensive set of rules and regulations in Circular 2, including contemporaneous transfer pricing documentation requirements. In general, companies are required to prepare contemporaneous transfer pricing documentation with aggregate-related party transactions of: