Local Tax Bureaus Receive Guidelines for Transfer Pricing Reviews

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Aug. 3 – The State Administration of Taxation continues to strengthen its transfer pricing oversight, releasing  guidelines last month on how local tax bureaus are to review extemporaneous documentation.

Released on July 12, Guoshuihan [2010] No. 323 specifically lays out the SAT’s expectations for local tax bureaus, instructing them to put together a list of taxpayers required to prepare contemporaneous documentation, create a list of the names of companies whose documents have been reviewed, and comment on the quality and completeness of the reviewed reports.

The local tax bureau will be required to review no less than 10 percent of all annual reports prepared by taxpayers in their jurisdiction and will choose their review targets based on the following criteria:

  • Related-party sale and purchase transactions exceed RMB200 million
  • Other related-party transactions, such as licensing services and financial interest, exceed RMB40 million
  • Single-function entities operating at a loss
  • Companies in the post-audit follow-up period
  • Companies with thin capitalization
  • Companies with cost-sharing agreements
  • Other conditions as determined by the SAT

The circular specifies that local tax bureaus must confirm the following information is contained within a company’s contemporaneous documentation:

  • Organizational structure
  • Industry analysis
  • Related party transaction analysis
  • Economic analysis
  • Transfer pricing method

The tax bureau will review the documentation and rate it as “good,” “average,” “poor,” or incomplete.”

The local tax bureaus have to submit their review of documentation reports covering the fiscal years ending in December 2008 and 2009 to the SAT by October 31, 2010.

For more information or advice with transfer pricing documentation, please contact Dezan Shira & Associates at tax@dezshira.com.

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