Editing Transfer pricing (section)

==China specific tax rules==
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Prior to 2009, China generally followed OECD Guidelines.  New guidelines were announced by the State Administration of Taxation (SAT) in March 2008 and issued in January 2009.<ref>Implementation Measures of Special Tax Adjustment (Trial), Guo Shui Fa (2009) No. 2 [Circular 2, as revised] issued by the [http://www.chinatax.gov.cn/n6669073/index.html State Administration of Taxation] of the People's Republic of China, in Chinese.  English translations are available from most of the major accounting firms, and vary slightly.  See, e.g., [http://www.kpmg.com/CN/en/WhatWeDo/Tax/Global-Transfer-Pricing-Services/Documents/Circular-20090108-0002-1e.pdf KPMG]'s version of the complete circular.  Hereafter referred to as the Circular or China Circular 2 Art. xx, where xx is the article number of Circular 2.</ref>  These guidelines differed materially in approach from those in other countries in two principal ways:  1) they were guidelines issued instructing field offices how to conduct transfer pricing examinations and adjustments, and 2) factors to be examined differed by transfer pricing method.  The guidelines covered:
*Administrative matters
*Required taxpayer filings and documentation
*General transfer pricing principles, including comparability
*Guidelines on how to conduct examinations
*Advance pricing and cost sharing agreement administration
*[[Controlled foreign corporation]] examinations
*[[Thin capitalization]]
*General anti-avoidance
On September 17, 2015, the SAT released a revised draft version of the "Implementation Measures for Special Tax Adjustment (Circular 2)," which replaced the previous 2009 guidelines.<ref name=":0">{{Cite web|url=http://www.china-briefing.com/news/2015/10/23/china-releases-new-draft-transfer-pricing-documentation-rules.html|title=China Releases New Draft of Transfer Pricing Documentation Rules|last=Yao|first=Rainy|date=2015-10-23|website=China Briefing|language=en-US|access-date=2016-06-30}}</ref> Three new sections were introduced under the revised draft: monitoring and management, intangible transactions/intra-group services and a new approach to transfer pricing documentation.

===Documentation===
Under the 2009 Circular, taxpayers must disclose related party transactions when filing tax returns.<ref>China Circular 2 Art. 11.</ref>  In addition, the circular provides for a three-tier set of documentation and reporting standards, based on the aggregate amount of intercompany transactions.  Taxpayers affected by the rules who engaged in intercompany transactions under RMB 20 million for the year were generally exempted from reporting, documentation, and penalties.  Those with transactions exceeding RMB 200 million generally were required to complete transfer pricing studies in advance of filing tax returns.<ref>China Circular 2 Art. 13-20.</ref>  For taxpayers in the top tier, documentation must include a comparability analysis and justification for the transfer pricing method chosen.<ref>China Circular 2 Art. 14 (iv) and (v).</ref>

The 2015 draft introduced an overhauled three-tiered standardized approach to transfer pricing documentation. The tiers vary in documentation content and include the master file, the local file, and the country-by-country report. The draft also requires companies involved with related-party service transactions, cost sharing agreements or thin capitalization to submit a so-called "Special File."<ref name=":0" />

===General principles===
Chinese transfer pricing rules apply to transactions between a Chinese business and domestic and foreign related parties.  A related party includes enterprises meeting one of eight different tests, including 25% equity ownership in common, overlapping boards or management, significant debt holdings, and other tests.  Transactions subject to the guidelines include most sorts of dealings businesses may have with one another.<ref>China Circular 2 Art. 9-10.</ref>

The Circular instructs field examiners to review taxpayer's comparability and method analyses.  The method of analyzing comparability and what factors are to be considered varies slightly by type of transfer pricing analysis method.  The guidelines for CUP include specific functions and risks to be analyzed for each type of transaction (goods, rentals, licensing, financing, and services).  The guidelines for resale price, cost-plus, transactional net margin method, and profit split are short and very general.

===Cost sharing===
The China rules provide a general framework for cost sharing agreements.<ref>China Circular 2 Art. 64, ''et seq''.</ref>  This includes a basic structure for agreements, provision for buy-in and exit payments based on reasonable amounts, minimum operating period of 20 years, and mandatory notification of the SAT within 30 days of concluding the agreement.