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Localisation of BEPS Transfer Pricing Recommendations in China – Consultation Draft of “Implementation Measures for Special Tax Adjustments”

On 17 September 2015, China’s State Administration of Taxation (SAT) issued a Consultation Draft of the circular “Implementation Measures for Special Tax Adjustments” (Consultation Draft), which would replace the existing Guoshuifa (2009) No. 2 (Circular 2). The SAT asked for public comments on the Consultation Draft by 16 October 2015. The existing Circular 2 contains the main body of rules on transfer pricing (TP) in China. It also covers other areas such as thin capitalisation, controlled foreign corporations, and the general anti-avoidance rule. The Consultation Draft can be considered a localisation of the recommendations of the G20/OECD’s Base Erosion and Profit Shifting (BEPS) project. It continues to follow the internationally accepted arm’s length principle, while adding some China-specific features that the SAT has advocated for some time. As in the China chapter ofthe United Nations (UN)TP Manual, concepts such as location savings, market premium, and other locationspecific advantages (LSAs) are advanced. The Consultation Draft is expected to bring many changes to the existing TP practice framework established by Circular 2. In this article, we focus on the areas that may have immediate and significant impact on most multinational companies (MNCs ) , including: documentation requirements, intra-group services, intangible property transactions, and advance pricing agreements (APAs). We will also provide a brief update on other important areas.