|
What's new in the "Annual Related-party Transactions Report"
We anticipated in our News Flash Issue 15 that the release of the Transfer Pricing Documentation ("TPD") requirements and the related policies will take place in two stages. On 5 December 2008, China's State Administration of Taxation ("SAT") has approved and then circulated the final template of the "Annual Related-party Transactions Report" (the "RPT Report") under a circular entitled Guoshuifa (2008) No. 114 ("Circular 114"). Taxpayers are required to file the RPT Report as part of their 2008 Corporate Income Tax ("CIT") return package on or before the statutory filing due date on 31 May 2009.
The RPT Report
The RPT Report contains a front cover and 9 separate forms. A brief summary of the information required on each of the forms is presented below:
Front cover 
It asks for some general information about the taxpayer, such as company name, legal representative, telephone number, submission date, in-charge tax bureau, etc.
Related party relationships (Form 1)
This Form requires the name, country/region, address, legal representative, and type of relationship of each related party (both domestic and overseas). The instructions to this Form provide a hint as to the definition of "related party" that is expected to be included in the soon-to-be-released final version of the Administrative Regulation on Special Tax Adjustments (the "Regulation"). (Note that the definition begins with direct or indirect share ownership of 25 percent or more, but is broadened by the inclusion of numerous other types of relationships that are not based upon share ownership, including control, dependency, etc.)
Summary of related party transactions (Form 2)
This Form is used to report the amounts of all transactions with overseas and domestic related parties. For each type of transaction, the taxpayer must also calculate the ratio of related party transactions to total transactions. The taxpayer must also answer the following yes or no questions:
- whether the taxpayer has prepared TPD according to the requirements;
- whether the taxpayer is exempted from preparing TPD; and
- whether the taxpayer has entered into a cost sharing arrangement in the current assessment year.
Purchases and sales (Form 3)
This Form requires information on all purchases of materials from, and all sales of goods to all domestic and overseas related and unrelated parties. This Form also asks for the name, country/region, and transaction amount of those overseas parties (related and unrelated) to whom export sales accounted for more than 10 percent of the total export sales; and from whom import purchases accounted for more than 10 percent of the total import purchases. The taxpayer must also indicate the transfer pricing method associated with those transactions with overseas related parties, but not those with overseas unrelated parties.
Services (Form 4)
This Form requires information on all services provided to, and all services received from domestic and overseas related and unrelated parties. This Form also asks for the name, country/region, and transaction amount of those overseas parties (related and unrelated) from whom overseas services income accounted for more than 10 percent of the total services income and to whom services expense accounted for more than 10 percent of the total services expense. The taxpayer must also indicate the transfer pricing method associated with those transactions with overseas related parties but not those with overseas unrelated parties.
Transfer of intangible assets (Form 5)
This Form requires the taxpayer to report the amounts of all transfers to/from related and unrelated parties (both domestic and overseas) of the following six categories of intangible assets:
- land use rights;
- patents;
- know-how;
- trademarks;
- copyrights; and
- others.
The Form is separated into two different sections: "use rights" and "ownership rights". There are no instructions provided for this Form.
Transfer of fixed assets (Form 6)
This Form requires the taxpayer to report the amounts of all transfers to/from related and unrelated parties (both domestic and overseas) in respect of the five categories of fixed assets (plus "others") as set forth in the CIT rules.
This Form is separated into two different sections: "use rights" and "ownership rights". There are no instructions provided for this Form.
Financing (Form 7)
This Form requires various details (currency, financing amount, interest rate, start/end dates, accrued interest, name of guarantor, guarantee fee, guarantee rate, etc.) for all fixed-term and other financing to/from both overseas and domestic related parties. This Form also requires the taxpayer to calculate the ratio of debt investment to equity investment from related parties. This is obviously for assessing the thin-capitalisation requirements.
Outbound investment status (Form 8)
This Form is applicable to taxpayer which own shares of a foreign enterprise. Where it holds shares in more than one foreign enterprise, then separate form must be completed for each foreign enterprise. This Form requires certain basic information (name, address, date of establishment, business scope, etc.) of the invested foreign enterprise, and details on the number and type(s) of shares of the invested foreign enterprise that are owned by the reporting taxpayer. This Form also requires details surrounding the annual corporate income taxes burdens and the various shareholders of the invested foreign enterprise. The taxpayer must also answer the some questions for identifying controlled foreign corporations.
Outward payments status (Form 9)
This Form requires the taxpayer to report the amounts of all dividend, rent, royalty, and service payments made (or accrued) to both related and unrelated overseas entities. The Form lists various different types of service fees (e.g., commission, design fee, consulting fee, management service fee, etc.). For each category of payments, the taxpayer must report any withholding taxes paid and must indicate whether the transaction is entitled to preferential tax treatment under a tax treaty.
Note that each of the 9 Forms must be signed and stamped by both the "preparer" and the "legal representative" of the company.
PwC observations
On taxpayers
- At the first glance, the headings of most of the forms in the RPT Report are not unfamiliar to foreign invested enterprises ("FIEs"). However, with a closer look, the depth of the information to be collected and then disclosed is much more than what was required under the former tax regime. For instance, transfer pricing methods, side-by-side comparative data of transactions with related parties and unrelated parties, domestic and overseas, declaration of requirement and existence of TPD at the time of filing, related-party debt-equity ratio, etc., are all very sensitive information.
- Apart from the sensitivity of the information, the connectivity and interaction among the three important documents, namely the RPT Report, the Annual CIT Return, together with the TPD, are also a challenge for taxpayers to achieve full compliance.
- The 2008 Chinese CIT Return Package released in early November 2008 allows a taxpayer to make a post-transaction transfer pricing adjustment as a "special tax adjustment". However, it indicates that the taxpayer can only make an "upward" adjustment (i.e., to increase its taxable income). Such an adjustment could provide the taxpayer with certain flexibility in managing its transfer pricing audit risks by voluntarily making upward transfer pricing adjustments. It remains to be seen, though, if the forthcoming regulation will offer further guidance in this area (e.g., guidance on how the company can reverse the upward adjustment impact in subsequent years). In the process of completing the RPT Report, the taxpayer has to consider very carefully whether it would make such upward adjustment in the CIT return. The potential impacts on indirect taxes (VAT, business tax) should be considered also.
- The SAT has not promulgated the final version of the regulation which will lay out the detailed rules on administering special tax adjustments relating to transfer pricing, in particular the TPD requirements, as well as other areas such as thin capitalization, controlled foreign corporations, and general anti-tax avoidance. Taxpayers have been eagerly awaiting it since the SAT issued a draft in March 2008. Probably most taxpayers have not prepared TPD up to now, pending the promulgation of the regulation. Some of them are expecting that the regulation should provide for conditions for exemption of preparing TPD; and some others just do not have a clear idea about how to get it prepared. However, Circular 114 reinforces that according to Article 43 (1) of the CIT law, taxpayers shall submit the RPT Report as part of their 2008 CIT Return Package to their local-level in-charge tax bureaus on or before the statutory filing due date on 31 May 2009. Then most taxpayers would puzzle how they should declare in the RPT Report (Form 2) that they have got their TPD ready if they have not completed one by the time they submit the RPT Report. In addition, without TPD, how can the taxpayer assure that the information to be disclosed in the RPT Report is consistent with the TPD? Perhaps, most importantly, the analysis undertaken with a TPD would probably be needed to quantify the amount of any voluntary post-transaction adjustment in the CIT Return - a decision which clearly should not be taken lightly.
On Chinese tax authorities
- We expect that the Chinese tax authorities would thoroughly analyse the information disclosed on the RPT Report when evaluating whether the taxpayer should be subject to a transfer pricing audit - this is certainly the experience in other jurisdictions. The RPT Reports from all the taxpayers together would allow the Chinese tax authorities to have a more complete picture and understanding of a particular industry or sector, and may even enable them to benchmark a profit level for that industry or sector.
- On the other hand, the new requirements in the RPT Report would not only serve as a challenge to taxpayers at large, but also provide an additional burden to local-level tax bureaus as they are supposed to review all the information in the reports. However, given the shortage of TP specialists at the local-level tax bureaus, it is necessary to wait and see how the SAT and local-level tax bureaus use this new source of information about taxpayers' related-party transactions.
- In light of the RPT Report template, there are still a number of open questions to be cleared. As always, PwC Transfer Pricing team will follow up closely with the relevant Chinese tax authorities for clarifications, and assist our clients in the process of their planning and compliance exercises. It is extremely important that businesses stay tuned for upcoming announcements, as we anticipate that the SAT and/or the Chinese Ministry of Finance will release a large number of new tax policies (not only transfer pricing-related ones) in the coming months, both before and after the year end.
Get your copy here
Download our China Tax/Business News Flash (Dec 2008, Issue 18) (pdf file, 95KB) for your reference.
Other Issues of China Tax/Business News Flash
Visit our Tax Library.
|
