In consideration of the global pandemic, it is widely anticipated that multinational companies with an international presence may increasingly become the focus of national tax authorities. Consequently, it is important to keep track of global compliance requirements during this turbulent period.

The pandemic as well as military/political clashes have the potential of a wide global impact, with accompanying changes on intra-group relationships in globally active corporations also having major knock-on impacts for tax purposes. This makes it even more important to have timely and transparent documentation of businesses for justification before the competent tax authorities.

The transfer pricing Master File is a useful tool to clarify the information on global business operations, organizational structures, intangible assets, financial and tax status at Group level.

The OECD BEPS Action Plan has also emphasized the importance of enhancing transparency for tax administrations by providing the tax authorities with adequate information to assess overall business operations, financial and tax aspects on a group level, with specific importance placed on the Master File. In fact, many countries have already reactively implemented the requirement of the Master File, including China. 

As per Chinese tax laws, taxpayers meeting the criteria below shall be obliged to submit the Master File:

• Corporate entity in the Chinese marketplace with cross-border intercompany transactions would be required to prepare the Master File as long as the ultimate holding company (i.e., the headquarters) has already prepared the Master File; or

• The annual total amount of the enterprise’s related party transactions exceeds CNY 1 billion. 

The Master file should be completed within 12 months from the end of the fiscal year of the group’s ultimate holding company.

Notwithstanding, further transfer pricing requirements could apply locally in reference to related-party transactions; for instance, Chinese enterprises with related party transactions are required to prepare the Local File in case any of the following thresholds are triggered:

• Annual amount of tangible assets ownership transfer no lower than RMB 200 million;

• Annual amount of financial assets transfers no lower than RMB 100 million;

• Annual amount of intangible assets ownership transfers no lower than RMB 100 million; or

• Annual amount of other types of related party transactions no lower than RMB 40 million.
  

Besides, for enterprises in a loss-making year and bearing limited functions and risks, the Local File, regardless of whether the annual related party transaction amounts trigger the abovementioned threshold/s, shall be prepared.

Our Observations

As an important reminder, if the company headquarters have already prepared the Master File (i.e., Criteria I), it is highly suggested that a well-prepared Master File in Chinese shall be delivered to Chinese tax authority.

We could provide our tailor-made assistance in the review/ translation of Master File/s as well as the preparation of the Local File upon your authorization.

If you would like to know more about the most recent tax and financial developments in China, or about the services mentioned above, please contact us at info@phcadvisory.com.