The Chinese Tax Bureau promulgated on 6 July 2009 the circular
number 363 on reinforcing control and investigation of transactions
According to the circular, companies that have been established
in China by a multinational company that have limited functions and
take limited risks (for example, a production company, distribution
company or research company) must maintain a reasonable level of
Therefore, if during a tax year, such a company bears losses, it
must prepare documentation on transfer pricing and submit it to the
competent tax authorities by 20 June of the following year.
The circular aims to maintain high levels of tax revenue in
China despite the financial crisis (by restricting attempts of
multinational companies to make their Chinese subsidiaries bear all
losses incurred abroad).
Some provisions of the circular introduce differences to the
measures relating to transfer pricing that were promulgated by the
Chinese Tax Bureau a few months earlier (8 January 2009).
For example, according to the measures, if sale and purchase
transactions between affiliated companies amount to less than RMB
200 million, or if the amount of transactions (not related to sales
and purchase) is less than RMB 40 million RMB, the Chinese company
should not prepare documentation on transfer pricing.
However, according to the circular, if a company that has
limited functions and takes limited risks bears losses during a tax
year, it must prepare documentation on transfer pricing regardless
of the value of transactions fulfilled.
According to the measures, if the tax authorities begin
investigations on a company that has no obligation to prepare
documentation on transfer pricing, the said company has 60 days to
prepare and submit documents proving that transactions have been
fulfilled at arm's length. In that case, only the documents
that are linked with the investigation shall be submitted.
However, pursuant to the circular, in case an investigation is
made in a company, such company must provide a complete
documentation on transfer pricing, which means full disclosure of
transactions between the company and its affiliates.
Finally, if a company that has limited functions and takes
limited risks bears losses, it must submit documentation on
transfer pricing by 20 June of the following tax year. The company
therefore only has six months to prepare documentation (as opposed
to the period required by one year the Measures). This imposes a
heavy burden on companies, which must also prepare an annual report
between January and May.
Some rules created by the Measures are being reinforced by the
circular. On the other hand, some principles are being altered,
which has triggered criticisms given that the original principles
included in the measures were only issued at the beginning of the
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