China

Special Tax Adjustments (Circular 2)  

The following are the key aspects of China's new Transfer Pricing regime, promulgated via the Administrative Regulations on Special Tax Adjustments (Circular 2) 2008. These new rules, effective starting from January 1, 2008, are an expanded clarification of the PRC Corporate Income Tax Law and its Implementation Rules.

Extensive contemporaneous documentation requirements for all companies with over RMB 200 million in annual related-party purchases and sales or over RMB 40 million in other related party transactions
Grace period for the completion of contemporaneous documentation for FY 2008 (until December 31, 2009). After that, contemporaneous documentation must be completed before May 31 of the year after the transactions take place
Annual reporting requirement for all companies with related party transactions, due May 31, 2009
Procedures for advance pricing arrangement applicants, minimal requirements for applications (RMB 40 million in annual related-party transactions and completion of contemporaneous documentation and annual reporting)
Details on audit targets and procedures, as well as penalties and other anti-avoidance provisions
Clarification on cost sharing agreements, thin capitalization and controlled foreign corporation
Related party threshold will remain at 25% ownership (a previous draft reduced this to 20%)