The People's Republic Of China - OECD

The People’s Republic of ChinaTransfer Pricing Country ProfileFebruary 2022SUMMARYREFERENCEThe Arm’s Length Principle123Does your domestic legislation orregulation make reference to the Arm’sLength Principle? YesWhat is the role of the OECD TransferPricing Guidelines under your domesticlegislation?China respects OECD TPG and incorporates the basic aspects of OECD TPG in thedomestic legislation.Does your domestic legislation orregulation provide a definition ofrelated parties? If so, please provide thedefinition contained under yourdomestic law or regulation. Yes NoEnterprise Income Tax Law, Chapter 6, Article41Public Notice of the State Administration ofTaxation [2017] No.6Public Notice of the State Administration ofTaxation on Issuing the “AdministrativeMeasures of Special Tax Investigation andAdjustment and Mutual Agreement Procedure” NoAny of the following relationships of an enterprise (one party) with other enterprises,organisations or individuals (the other party) shall constitute a “related partyrelationship”:Public Notice of the State Administration ofTaxation [2016] 42Public Notice on Matters Regarding Refiningthe Filing of Related Party Transactions andAdministration of Contemporaneous TransferPricing Documentation(i) One party directly or indirectly owns 25% or more shares of the other party; or acommon third party directly or indirectly owns 25% or more of shares of bothparties.(ii) One party owns shares of the other party, or a common third party owns sharesof both parties, even though the percentage of shares held in either situation is lessthan the percentage as specified in item (i), the total debt between both partiesaccounts for 50% or more of either party’s total paid-in capital, or 10% or more ofThe People’s Republic of ChinaUpdated February 2022

one party’s total debt is guaranteed by the other party (except for loans or guaranteesfrom or between independent financial institutions).(iii) One party owns shares of the other party, or a common third party owns sharesof both parties, even though the percentage of shares held in either situation is lessthan the percentage as specified in item (i), the business operations of one partydepend on the proprietary rights, such as patents, non-patented technological knowhow, trademarks, copyrights, etc., provided by the other party.(iv) One party owns shares of the other party, or a common third party owns sharesof both parties, even though the percentage of shares held in either situation is lessthan the percentage as specified in item (i), the business activities, such as purchases,sales, receipt of services, provision of services, etc., of one party are controlled bythe other party.(v) More than half of the directors or senior management (including secretaries ofthe board of directors of listed companies, managers, deputy managers, financialcontrollers and other personnel specified in the company’s articles of association) ofone party are appointed or assigned by the other party, or simultaneously serve asdirectors or senior management of the other party; or more than half of the directorsor senior management of both parties are appointed or assigned by a common thirdparty.(vi) Two natural persons who are spouses, related by lineal consanguinity, siblings,or in other custodianship/family maintenance relationships have one of therelationships as specified in items (i) to (v) with one party and the other partyrespectively.(vii) Two parties substantially have common interests in other ways.Transfer Pricing Methods4Does your domestic legislation providefor transfer pricing methods to be usedin respect of transactions betweenrelated parties? YesPublic Notice of the State Administration ofTaxation [2017] No.6 NoIf affirmative, please check those provided for in your ther (If so,please describe) Public Notice of the State Administration ofTaxation on Issuing the “AdministrativeMeasures of Special Tax Investigation andAdjustment and Mutual Agreement Procedure”Other methods may refer to assets appraisal methods like cost approach, marketapproach and income approach, and some other methods that are in line with theThe People’s Republic of ChinaUpdated February 2022

principle of “profits should be taxed in the jurisdiction where economic activitiesoccur and value is created”.5Which criterion is used in yourjurisdiction for the application oftransfer pricing methods?Please check all that apply:Article 16-22 Hierarchy of methodsPublic Notice of the State Administration ofTaxation [2017] No.6 Most appropriate method Other (if so, please explain)Tax authorities should select the appropriate transfer pricing method(s) to analyzeand examine enterprises’ related party transactions based on comparability analysis.6If your domestic legislation orregulations contain specific guidance oncommodity transactions, indicate whichof the following approaches is followed. For controlled transactions involving commodities, the guidance contained inparagraphs 2.18-2.22 of the TPG is followed. Domestic legislation mandates the use of a specific method for controlledtransactions involving commodities (if so, please explain) Other (if so, please explain)No specific guidance on commodity transactions is provided in our domesticlegislation.Comparability Analysis7Does your jurisdiction follow (or largelyfollow) the guidance on comparabilityanalysis outlined in Chapter III of theTPG? YesArticle 15 NoPublic Notice of the State Administration ofTaxation [2017] No.6When carrying out a transfer pricing investigation, tax authorities should conductcomparability analysis under the framework of TPG.8Is there a preference in yourjurisdiction for domestic comparablesover foreign comparables?9 Yes No Yes NoThe People’s Republic of ChinaPublic Notice of the State Administration ofTaxation [2017] No.6Updated February 2022

1011Does your tax administration use secretcomparables for transfer pricingassessment purposes?Tax authorities are allowed to use both public and secret comparables for TPassessment purpose.Does your legislation allow or requirethe use of an arm’s length range and/orstatistical measure for determiningarm’s length remuneration? YesArticle 25 NoPublic Notice of the State Administration ofTaxation [2017] No.6Are comparability adjustmentsrequired under your domesticlegislation or regulations? YesArticle 17-20 NoPublic Notice of the State Administration ofTaxation [2017] No.6When analysing and evaluating whether a related party transaction is consistent withthe arm's length principle, tax authorities may calculate different statistics, such asarithmetic average, weighted average or the inter-quartile range to determine thepoint or range of the profit or price of the comparables. The calculation can be doneon a year-by-year basis or multiple-year average basis.If there are significant differences between related party transactions and unrelatedparty transactions, reasonable adjustments should be made to account for the effectof these differences.Intangible Property12Does your domestic legislation orregulations contain guidance specific tothe pricing of controlled transactionsinvolving intangibles? YesArticle 30-32 NoPublic Notice of the State Administration ofTaxation [2017] No.6Value contributions are the main factors to be taken into account for the allocationof income derived from intangible assets, and full consideration should be given tothe contributions of the parties with respect to the DEMPE functions relating to theintangibles.If an enterprise pays royalties to a related party that merely owns the intangible assetsbut does not contribute to the value of the assets, and the arm's length principle hasnot been followed, the tax authorities may make a special tax adjustment.Royalties received from or paid to related parties must correspond to the economicbenefit the intangible assets bring to the enterprise and its related parties. If there areno economic benefits and the arm's length principle has not been followed, the taxauthority may make a special tax adjustment.The People’s Republic of ChinaUpdated February 2022

1314Does your domestic legislation orregulation provide for transfer pricingrules or special measures regardinghard to value intangibles (HTVI)? YesAre there any other rules outsidetransfer pricing rules that are relevantfor the tax treatment of transactionsinvolving intangibles? YesArticle 22 NoPublic Notice of the State Administration ofTaxation [2017] No.6 NoAssets appraisal methods like cost approach, market approach and income approachcan be applied where appropriate.Intra-group Services15Does your domestic legislation orregulations provide guidance specific tointra-group services transactions? YesArticle 34-36 NoPublic Notice of the State Administration ofTaxation [2017] No.6Fees paid by subsidiaries that receive intra-group services should not simply beregarded as fees for low value-adding services to which the safe harbor rule applies,but instead, the following "six tests" should be used to determine the arm's lengthnature of the services: "benefit test," "necessity test," "duplication test," "valuecreation test," "remuneration test," and "authenticity test."In the following circumstances, if the arm's length principle is not followed, the taxauthorities may make a special tax adjustment: 16Do you have any simplified approachfor low value-adding intra-groupservices?The People’s Republic of ChinaWhere an enterprise make payments to its related parties for non-beneficialservices;Where an enterprise make payments to an overseas related party that does notperform functions, does not bear risks, and has no substantial operatingactivities;Where an enterprise establishes a holding company or financing companyoverseas for the main purpose of financing and listing, and the enterprise paysroyalties to an overseas related party due to the spinoff benefits generated fromthe relevant financing and listing activities. Yes NoUpdated February 2022

17Are there any other rules outsidetransfer pricing rules that are relevantfor the tax treatment of transactionsinvolving services? Yes NoFinancial transactions1819[NEW] Does your domestic legislationor regulations provide guidance specificto financial transactions? Yes[NEW] Are there any other rulesoutside transfer pricing rules that arerelevant for the tax treatment offinancial transactions?(e.g. whether yourjurisdiction has implemented the measuresin BEPS Action 4 to limit interestdeductions and other financial paymentsor any similar rules) Yes No NoThe thin capitalization rule set out in the Implementation Measures of Special TaxAdjustments (Trial Version) (more commonly known as the “Circular 2”) requiresthat the related party debt to equity ratio should not exceed the standard ratio.Otherwise the interest expense will not be deductible for income tax purposes unlessit can be demonstrated that the related party pricing is consistent with the Arm’sLength Principle. The standard ratio is explicitly provided in Circular Cai Shui[2008] No.121 as 2:1 for business in most industries and 5:1 for companies infinancial service sector. The thin capitalization rule in this sense, is not consideredother rules outside transfer pricing rules.Cost Contribution Agreements20Does your jurisdiction have legislationor regulations on cost contributionagreements? YesEnterprise Income Tax Law, Chapter 6, Article41 NoThe cost incurred in joint development of intangibles by related parties shall bedetermined by arm’s length principle.Transfer Pricing Documentation21Does your legislation or regulationsrequire the taxpayer to prepare transferpricing documentation? Yes NoIf affirmative, please check all that apply:Public Notice of the State Administration ofTaxation [2016] 42 Master file consistent with Annex I to Chapter V of the TPGThe People’s Republic of ChinaUpdated February 2022