China: Local file, master file, special issues file and CbCR required under the discussion draft of revised transfer pricing requirements
The State Administration of Taxation (SAT) released on 17 September 2015 the discussion draft of Implementation Measures of Special Tax Adjustments, Guo Shui Fa  No.2 (hereinafter as the ‘draft Circular 2’) for public consultation. The draft Circular 2 is SAT’s response to achieve greater transparency and clarity on certain open issues in the previous version of Circular 2, to implement various commendations proposed in the Base Erosion and Profit Shifting (BEPS) Action Plans, and to incorporate the principles of special tax adjustments promulgated in other existing tax circulars.
The draft Circular 2, which deals with transfer pricing (TP) and anti-avoidance rules, proposes new TP documentation requirements under a three tier approach - local file, master file and special issues file. The OECD’s country-by-country reporting (CbCR) requirements have also been incorporated as related party transaction disclosures forming part of the annual corporate income tax return for certain taxpayers.
Taxpayers will be required to make additional disclosures and analyses of their business operations compared to current TP documentation requirements. For example, the local file is significantly expanded and requires taxpayers to include items not previously required in the current Circular 2 such as value chain, foreign investment, intragroup equity transfer and intragroup services. The master file requires taxpayers to disclose its group organisational structure, business description, intangibles arrangement, financing arrangements, and financial and tax positions, which is consistent with the BEPS report on Action 13, Guidance on TP documentation and CbCR. Of note is the special issues file which is a new and additional element to China TP documentation focusing on intragroup services, cost sharing agreements and thin capitalisation.
CbCR would apply to multinational corporations (MNC) in China with consolidated group revenues of RMB 5 billion or greater whose ultimate parent or shareholder is a China entity; or an MNC whose ultimate parent or shareholder is a non-China entity and where the China taxpayer subject to annual corporate income tax filing is nominated as the CbCR Reporting Entity by the MNC.
The effective date of the draft Circular 2 is not stated and it is unclear when the new requirements would be implemented. Therefore, if the SAT follows the OECD’s proposed approach then the rules would be effective for the 2016 financial year in China (being the year beginning 1 January 2016), with a resulting filing date of 31 May 2017 for the China taxpayer. However, if the SAT decides to implement the rules ahead of the OECD’s proposed schedule, then potentially the new TP documentation rules could apply for the 2015 financial year with a resulting filing date of 31 May 2016. The deadline for comments from the general public is 16 October 2015 and we urge all taxpayers to provide their views to the SAT.