China Transfer Pricing Documentation Handbook

Author: Dr Jian Li of Kunda China
Sourced from Wolters Kluwer China Tax & Accounting Reference

Preface

Introduction

On 13 July 2016, the State Administration of Taxation (“SAT”) released Announcement of the State Administration of Taxation on Matters Relating to Improved Administration of Related Party Declarations and Contemporaneous Documentation (SAT Announcement [2016] No. 42). The announcement revises and upgrades some key aspects of Notice of State Administration of Taxation on Printing and Distribution of the Implementation Measures for Special Tax Adjustment (for Trial Implementation) (Guoshuifa [2009] No.2) and provides new transfer pricing compliance requirements in China. Key changes in the announcement that will impact China transfer pricing documentation and disclosures are based on the introduction of three-tiered documentation requirements.

Documentation and Disclosure Forms

Announcement 42 adopts a three-tiered approach for transfer pricing documentation including Master File, Local File and Special Issue File. Specifically:

  • Master File – the Master File is required if the entity has cross-border related party transactions and the ultimate holding enterprise has already prepared the Master File, or the total amount of related party transactions in the year exceeds RMB 1 billion.
  • Local File – Companies whose amount of yearly related party transactions satisfy any one of the following criteria shall prepare Local File:
  1. The amount of transfer of ownership of tangible assets exceeds RMB200 million.
  2. The amount of transfer of financial assets exceeds RMB100 million.
  3. The amount of transfer of ownership of intangible assets exceeds RMB100 million.
  4. The total amount of other related party transactions exceeds RMB40 million.
  • Specific Issue File – There is no specific threshold criterion for the Special Issue File. An enterprise which has entered into or executed a Cost-Sharing Agreement; or where the related party debt equity ratio of the enterprise exceeds the standard ratio and it is required to state whether the independent transaction principle is complied with.

In addition, the number of disclosure forms required to be completed and submitted with the yearly tax return has now increased from 9 to 22 including the Country-by-Country Reporting (CbCR).

From now on, taxpayers should review their transfer pricing systems, identify the gap between the existing transfer pricing documentation and the new contemporaneous documentation requirements and prepare protocols for gathering additional documentation under the new compliance requirements.

The Handbook

Multinational transfer pricing policies need to be consistent across Master File, Local File and Disclosure Forms (including CbCR). This China Transfer Pricing Documentation Handbook (including a Master File Documentation Template) has been prepared in English and Chinese to facilitate multinationals to adopt and operate a consistent and coordinated approach to prepare the transfer pricing documentation. The Handbook aims at providing multinationals a useful tool to document the transfer pricing policies in China under the new documentation requirements.

Announcement 42 requires every taxpayer to submit very detailed Disclosure Forms, incorporating where applicable the CbCR mentioned above, along with their yearly tax returns if they have entered into any related party transactions during the fiscal year under review. For many taxpayers, the sheer volume of information that needs to be collected to complete the Forms will substantially increase the compliance burden. To enable this type of detailed information to be produced on a reliable and timely basis, in this Handbook we have developed a user-friendly, MS Excel version of the Forms that will be suitable for multinationals to capture, communicate and record the information quickly and efficiently.

China Transfer Pricing Practices

Regulatory Developments

Since the Action Plan on Base Erosion and Profit Shifting (“BEPS”) was officially revealed by the G20, the SAT has reiterated its determination to strengthen co-operation with the OECD on the BEPS project and has also set forth its general positions to address BEPS issues in China. This is reflected in the recent transfer pricing regulatory and enforcement developments in the country as follows:

• On 29 July 2014, the SAT released the Notice of Anti-Avoidance Examination on Significant Outbound Payments (Circular [2014] No. 146). In this Circular, the SAT instructs local tax authorities to survey substantial payments of service fees and royalties with a view to launching extensive audits, placing particular focus on payments to low tax jurisdictions.

• On 29 August 2014, the SAT released the ‘Announcement of the State Administration of Taxation on Monitoring and Management of Special Tax Adjustments’ (“Announcement [2014] No.54”), to state their position with respect to the monitoring and management of special tax adjustments. When tax authorities identify a taxpayer with special tax adjustment risks they may issue a “Notice of Tax Matters” to the taxpayer to highlight the existing special tax adjustment risks. It should be noted however that even if the taxpayer makes self-adjustments for additional tax payment, the tax authority is still empowered to launch a special tax investigation and implement tax adjustments according to the Announcement.

• On 25 September 2014, the SAT held a conference in Beijing to introduce the 2014 deliverables of the BEPS project. At the conference, the Head of the International Taxation Department of SAT, Mr Liao Tizhong publicly addressed 15 expectations of the SAT to taxpayers on international tax, especially transfer pricing matters, as China’s formal response to the BEPS initiatives at the state SAT level.

• On 2 December 2014, The SAT released the “Administrative Measures on the General Anti-Avoidance Role (GAAR) in the form of SAT Order N0. 32. The Measures contain comprehensive guidance on the implementation of GAAR and reiterate that both “purpose test” and “substance test” should be adopted in a GAAR assessment. The Measures serve as the last resort to counter cross-border aggressive tax avoidance schemes. Many multinational companies are interested in how GAAR would interplay with offshore indirect equity transfers.

• On 5 December 2014, the SAT issued the “China Advance Pricing Arrangement Annual Report (2013)”. This is the fifth annual APA report released by the SAT to update taxpayers on the mechanisms, procedures and track record of the APA program in China. The 2013 APA Report focused on statistics and analyses of China's APA program between 2005 and 2013.

• On 3 February 2015, the SAT released an Announcement [2015] No. 7 (Announcement 7). The Notice provides detailed assessment and procedural guidelines for offshore indirect property transfers. Announcement 7 outlines a new landscape for tax treatments on offshore indirect transfer of China Taxable Properties and provides important guidelines regarding the factors for assessing reasonable commercial purpose, safe harbour rule, voluntary reporting regime and withholding obligation.

• On 18 March 2015, the SAT released the Announcement Regarding Certain Corporate Income Tax Matters on Outbound Payments to Overseas Related Parties (Announcement [2015] No.16). Notice 16 reiterates that outbound payments to overseas related parties should follow the arm's length principle, and more importantly, specifies four types of payments that should not be deductible for corporate income tax purpose.

• On 13 July 2016, the SAT released Announcement of the State Administration of Taxation on Matters Relating to Improved Administration of Related Party Declarations and Contemporaneous Documentation (SAT Announcement [2016] No. 42 ). Making reference to many respects of the recommendations of the BEPS Action Plans, the Announcement revises and upgrades some key aspects of the existing Notice of State Administration of Taxation on Printing and Distribution of the Implementation Measures for Special Tax Adjustment (for Trial Implementation)  (Guoshuifa [2009] Circular 2) and is focused on compliance (documentation and related party disclosure forms). Other aspects of Circular 2 such as audits and APAs will be updated in separate regulations.

Specific Issues and High-Risk Transactions

In response to the fact that a large proportion of contract manufacturers have been reporting losses despite having a limited function and risk profile, the SAT has identified such companies as specific audit targets. On 7 March 2007, the SAT released the Circular of the State Administration of Taxation on Intensifying Investigation into and Analysis of Transfer Pricing, known as Guoshuihan [2007] 236 (“Circular 236”), to state their position with respect to the expected profitability of foreign investment enterprises in China which undertake the sole function of manufacturing for their overseas parent companies. Circular 236 targets enterprises with the following characteristics:

The enterprise has the sole function of manufacturing based on the overall business plans and production orders of overseas parent companies;

The enterprise has overseas parent companies or other affiliates who are wholly responsible for their operating policy, product research and development (“R&D”), sale functions, etc; and

The enterprise does not bear the associated risks and losses arising from ineffective policies, under-utilisation of production capacity and slow market demand.

On 6 July 2009, the SAT issued the Notice on Strengthening the Supervision and Investigation of Cross-Border Related Party Transactions (Guoshuihan [2009] No. 363), to provide further guidance on the treatment of loss-making single function entities that are routine in nature. Guoshuihan [2009] No. 363 expanded the target sphere to not only single function manufacturers but also single function distributors and contract R&D service providers.

It is crucial that companies with contract manufacturing operations in China document their commercial operations, industry environment and functional profile in the form of proper transfer pricing documentation supported by an economic analysis and legal agreements.

In addition to issues with the single function loss-making companies, the SAT is also shaping its positions in the following areas:

Local marketing intangibles — this is relevant where a foreign-invested entity performs sophisticated marketing functions in China, the SAT may take the view that these lead to the creation of local marketing intangibles (which need to be rewarded with higher profitability). For example, the SAT may claim that luxury goods companies cannot be regarded as limited-risk distributors or retailers and it is not reasonable for foreign parent companies to claim that all the marketing intangibles belong to them;

Location savings — there is uncertainty about whether some or all of the cost savings gained by a multinational for being able to produce in China at a lower price than abroad should be recognised in the China entity or the foreign parent company. This concept has increasingly become the focus of debate between taxpayers and Chinese tax authorities in the transfer pricing audit process;

China market premium — the success of the car industry in China enables cars to be sold at a premium in this market relative to international markets. The issue here is how to quantify this market premium and which party should enjoy the benefit of it; and

Outbound royalty payments — when a new manufacturing venture is established in China, the transfer of design and manufacturing know-how usually gives rise to a royalty payment. Deductibility of royalty payments (and to a lesser extent, service fees) has always been an issue of contention in China.

Enforcement Activity

At present, there are approximately 800,000 tax officials in China, of which only around 300 tax officials appear to be devoted exclusively to anti-tax avoidance activities. However, this number is increasing rapidly with ongoing training programs provided by the OECD and other tax authorities.

Around 6,000 transfer pricing reviews are carried out every year, and the SAT has issued a requirement for local tax authorities to spot check at least 10% of all taxpayers that are required to prepare transfer pricing documentation. Therefore, the SAT is well equipped to enforce the transfer pricing rules, and has been doing so with increased vigor and confidence since the release of the Notice of State Administration of Taxation on Printing and Distribution of the Implementation Measures for Special Tax Adjustment (for Trial Implementation) (Guoshuifa [2009] No. 2).

Focus of investigation

In China, the focus of transfer pricing investigation lies mainly with large foreign multinationals which have significant investments in China, and this involves a rigorous review process of major taxpayers on a yearly basis. Seven specific criteria outlined in the STA Guidelines are considered by the tax authorities in China, and the fulfillment of such criteria increases the risk of transfer pricing review and investigation:

Enterprises which have a significant amount of related party transactions or have various related party transactions;

Enterprises with long-term losses, marginal profit or fluctuating profit;

Enterprises whose profit level is lower than that of the industry;

Enterprises whose profit level obviously does not comply with the functions performed and risks borne;

Enterprises which have transactions with related parties registered in tax havens;

Enterprises which fail to declare their related party transactions or prepare contemporaneous documentation; and

Enterprises which obviously violate the arm’s length principle.

The final category appears to be a “catch-all” provision to pick up any other transactions that are not caught within the specific criteria above.

Article 30 of the STA Guidelines also provides that for transactions between related parties in China which bear the same actual tax burden, transfer pricing investigation and adjustment will in principle not be carried out, as long as such transactions do not reduce the overall tax revenue of the State directly or indirectly. 

In practice, it is understood that the Mainland tax authorities pay close attention to those companies that are:

Reporting persistent losses but continuing to expand their operations;

Showing an irregular profit or loss pattern; and/or

Avoiding tax liabilities through entering into transactions with related parties in tax havens.

The SAT will intensify industry-focused or group enterprise-oriented national joint investigations. The pharmaceutical and automotive industries have been a primary target for transfer pricing investigations, although by no means have such investigations been limited to these industries. The major transfer pricing issues within these industries are outbound royalty payments and local marketing intangibles.

In addition, the SAT has been investigating enterprises which have transactions with related parties in tax havens. Other key investigation areas include equity transfers between related parties (the subject of a high profile audit case concerning valuation methodologies), and domestic companies with outbound investment and administration in relation to controlled foreign corporations (“CFCs”).

The SAT plans to strengthen its anti-avoidance capabilities by establishing a team of 500 anti-avoidance specialists (with a focus on transfer pricing investigation at this stage) in order to enhance the technical skills of the tax authorities, thus enabling them to handle more complex cases.

Furthermore, to improve the quality of the anti-avoidance work, the SAT has set up a panel review program in the form of a group of anti-avoidance tax auditors who would jointly review and assess major cases, such as national industry-oriented investigations and cross-region investigations on large group enterprises.

The SAT has requested the local-level tax bureaus to launch a comprehensive tax examination on significant outbound service fee and royalty fee payments to overseas related parties of a multinational company, with an aim to strengthen the tax administration on intra-group charges and prevent profit shifting. Six tests that would be applied to determine whether such charges warrant a transfer pricing adjustment are highlighted as follows.

Benefit Test

China applies a benefit test and a price test when a parent company provides a service to its Chinese subsidiary, or when a subsidiary provides a service to another subsidiary. A critical issue in determining whether a service has been rendered is whether a benefit has been provided, that is, whether the service activity provides a respective group member with economic or commercial value to enhance its commercial position. In other words, the activities performed by the overseas service provider must be examined to ensure they pass the “benefit test”. If not, a charge for their provision is not necessary.

Need Test

If the service can be outsourced to a third party, then the Chinese subsidiary should go to the local market in China to find a company to perform the service.

Duplication Test

China's duplication test addresses the situation where management teams in subsidiaries perform management activities autonomously with the only role performed by parent companies being approval of the decision based on authorization requirements.

In this situation, these types of management services are likely to be duplicative activities or shareholder activities and therefore should not be chargeable to the subsidiary.

Value Creation Test

An activity provides a benefit if it directly results in a reasonably identifiable increment of economic and commercial value that enhances the recipient's commercial position or that may be reasonably anticipated to do so. As with the duplication test, there is a question over whether approval from management in the parent company is sufficient to create an identifiable increment of economic or commercial value.

Remuneration Test

When analysing the intragroup services, account should be taken whether the provision of services from the parent company to the subsidiary in China already has been remunerated through the transfer pricing policies of other related-party transactions.

Authenticity

In China, an enterprise is usually requested to provide evidence to support its tax deductions when the Chinese tax authority raises concerns on the authenticity, nature and reasonableness of such service expenses.

Recommendations

All these transfer pricing regulatory and enforcement developments introduce a significant change in China transfer pricing landscape with important implications for multinational enterprises in doing business in China.

Multinationals in China are well advised to:

• Aim for and achieve a high level of compliance with the disclosure, documentation and filing requirements;

• Undertake a prudential risk review of their transfer pricing affairs so that resources and budget can be devoted to areas of highest value in terms of risk mitigation or realisation of opportunities;

• Design the transfer pricing system in a way that will stand up to scrutiny in the future;

• Carry out economic analyses to provide real evidence to support the pricing of related party transactions;

• Undertake regular reviews of the transfer pricing system to ensure that it reflects the commercial reality of how the business is being conducted in practice;

• Use a specialist adviser to prepare the required transfer pricing documentation, validate the design of the system and perform the requisite economic analysis, which will further help manage the risks of scrutiny and adjustment by the tax authorities.

A Summary of Documentation and Disclosure Requirements

Definition of Related Party

Article 2 of Announcement 42 defines a "related party relationship" as any of the following relationships which the enterprise has with another enterprise, an organization or an individual:

  • One party directly or indirectly owns more than 25% of the shares of the other party; or a common third party directly or indirectly owns more than 25% of the shares of both  parties
  • If one party owns the shares of the other party, or a common third party owns the shares of both parties, but the percentage of shares held in either situation is less than the percentage as specified in paragraph one, however the debt between both parties account for more than 50% of either party’s total paid-up capital, or more than 10% of one party’s total debt is guaranteed by the other party.
  • If one party owns the shares of the other party, or a common third party owns the shares of both parties, but the percentage of shares held in either situation is less than the percentage as specified in paragraph one, however the business operations of one party depend on the proprietary right provided by the other party.
  • If one party owns the shares of the other party, or a common third party owns the shares of both parties, but the percentage of shares held in either situation is less than the percentage as specified in paragraph one, however the business activities of one party are effectively controlled by the other party.
  • More than half of the directors or the high level management of one party are appointed or assigned by the other party, or simultaneously hold position as the directors or the high level management of the other party; or more than half of the directors or the high level management of both parties are assigned by a third party.
  • Two individual in an affinity relationship, lineal relationship or collateral relationship by blood respectively having relationship with one party and the other party as specified in any of paragraph 1 to 5.
  • Two parties having common interests in other ways.

Tax Return Disclosures

The new Related Party Transaction Forms consist of 22 forms in total (previous nine forms) including the Country-by-Country Reporting (CbCR). The CbCR filling requirement mainly applies to the ultimate parent companies in China. However, a foreign subsidiary of multinational company in China may also be required to submit CbCR in a transfer pricing investigation if its overseas ultimate holding company should prepare the CbCR according to the regulation of the jurisdiction it resides. The 22 forms require all taxpayers with related party transactions to provide considerably detailed information regarding those transactions to the SAT on a yearly basis.

Level of Documentation

Announcement42 adopts a three-tiered approach for transfer pricing documentation including Master File, Local File and Special Issue File.

Master File:

Companies meeting either of the following criteria shall prepare the Master File:

  • Have cross-border related party transactions and the ultimate holding enterprise has already prepared the Master File, or
  • The total amount of related party transactions exceeds RMB 1 billion.

Local File:

Companies whose amount of yearly related party transactions satisfy any one of the following criteria shall prepare Local File:

  • The amount of transfer of ownership of tangible assets exceeds RMB200 million.
  • The amount of transfer of financial assets exceeds RMB100 million.
  • The amount of transfer of ownership of intangible assets exceeds RMB100 million.
  • The total amount of other related party transactions exceeds RMB40 million.

Special Issue File:

There is no specific threshold criterion for the Special Issue File. Companies meeting either of the following criteria shall prepare the Special Issue File:

  • An enterprise which has entered into or executed a cost-sharing agreement; or
  • Where the related party debt equity ratio of the enterprise exceeds the standard ratio and it is required to state whether the independent transaction principle is complied with.

Language for documentation

Documentation to be submitted to the tax authority should be in Chinese.

Deadline to Prepare Documentation

The Master File should be completed within 12 months after the fiscal year end of the group’s ultimate holding company, while the Local File and Special Issue File should be completed by 30 June of the year following the year in which the related party transactions occur.

Deadline to Submit Documentation

The transfer pricing documentation should be submitted within 30 days upon the tax authorities’ request.

Statute of limitations

The statute of limitations for transfer pricing adjustments is 10 years.

Transfer pricing methods

A reasonable method should be selected. The CUP, resale price, cost plus methods should be considered but other methods such as profit split and TNMM may also be acceptable. A “deemed profit rate” may be used in case the taxpayer is unable to effectively document its transfer pricing position.

Comparables

The tax authorities may use public information or non-public information in analysing and evaluating whether the enterprise’s related party transactions comply with the arm’s length principle.  However, the SAT has acquired regional and global databases, including Bureau van Dijk products, to improve the quality of searches undertaken.

Content requirements

Announcement 42 adopts a three-tiered approach for transfer pricing documentation including Master File, Local File and Special Issue File.

Master File:

The information required for the Master File includes:

  • Organisation structure

An organizational chart for the company to illustrate the global organisation structure and equity structure of the enterprise group and geographical distribution of all the member entities.

  • Business of an enterprise group

A description of the global group’s business, including profit divers, supply chain and geographical markets of the top five products or services, important services rendered by related parties, a brief functional and risks analysis for group entities as well as recent business restructurings.

  • Intangible assets

A description of the global group’s intangibles such as overall strategies for development and application of intangibles and determination of ownership of intangibles, important agreements on intangibles, the group’s transfer pricing policies for R&D and intangibles.

  • Financing activities

Information on the global group’s financing arrangements with both related and unrelated parties, member entities performing centralised financing function, overall transfer pricing policy for financing arrangements.

  • Financial and tax situation

Information on the global group’s financial and tax position, containing consolidated financial statements, APAs, other tax rulings on income allocation as well as the entity submitting the CBC report.

Local File:

The information required for the Local File includes:

  • Overview of local enterprise

Organisation structure

Management structure

Business description

Business strategies

Financial data for each business

Information on restructuring or transfer of intangibles

  • Related party relationships

Information on related parties involved

Information on the income taxes of each related party

.Changes in the enterprise's related party relationships

  • Related party transactions

Overview of related party transactions

Value chain analysis

Outbound investments

Related party equity transfer

Related party services

APAs and tax rulings related to related party transactions

  • Comparability analysis

Factors taken into consideration in comparability analysis

Information on functions performed, risks borne and assets used by comparable companies

Selection criteria and rationale for accepted comparable information

Information on internal or external comparable uncontrolled transactions and financial information of comparables

Comparable adjustments and the underlying reason

  • Selection and application of transfer pricing method

Selection of tested party and the underlying reason

Selection of transfer pricing method and the underlying reason, the enterprise’s contribution to the group's overall profit or residual profit

Assumptions and judgment made in establishing arm’s length prices or profit

Application of transfer pricing method and comparability analysis results

Any other materials supporting the selected transfer pricing method

Analysis and conclusion of whether the transfer pricing policy is of arm’s length nature

Special Issue File

Special Issue File includes special issue file for cost-sharing agreements and special issue file for thin capitalisation.

  • Special issue files for a cost-sharing agreement shall include:

Copy of the cost sharing agreement.

Other agreements among participants for the implementation of the cost sharing agreement.

Use of the results of the agreement by non-participants, the amount and form of payment, and allocation method of the payment among the participants.

Changes to the participants under the cost sharing agreement in the year.

Descriptions of amendments to or termination of the cost sharing agreement.

Total cost incurred under the cost sharing agreement during the year and the cost structure.

Cost allocation among participants during the year.

Comparison of actual benefits in the year with the anticipated benefits under the agreement, and the adjustments made accordingly.

Calculation of the anticipated benefits including the selection of parameters, calculation method and reason of change.

  • Special issue files for thin capitalisation shall include:

Analysis of the enterprise's repayment capacity and borrowing capacity;

 Analysis of the group's borrowing capacity and financing structure;

Description of changes to equity investment of the enterprise;

Nature and objectives of debt investment from related parties, and the market conditions at the time the debt investment was obtained;

Currency, amount, interest rate, term and financing terms of debt investment from related parties;

Whether an independent enterprise is capable and willing to accept the aforementioned financing terms, amount and interest rate;

Collaterals provided by the enterprise in order to obtain the debt investment together with the relevant terms;

Details of the guarantor and the terms of guarantee;

Interest rate and financing terms of similar loans contemporaneous to the debt investment from related parties;

Terms of conversion of convertible bonds; and

Other information that can support the conformity with the arm's length principle.


Masterfile template

Table of contents

Executive Summary ....................................

pg no

1

Introduction ....................................

pg no

1.1

Purpose of report ....................................

pg no

1.2

Scope of report ....................................

pg no

1.2.1

Date of effect ....................................

pg no

1.2.2

Transactions covered ....................................

pg no

1.2.3

Basis of analysis ....................................

pg no

1.3

Summary of findings ....................................

pg no

1.4

Structure of report ....................................

pg no

2

Company Information ....................................

pg no

2.1

Overview of legal structure with indication of geographic location of entities ....................................

pg no

2.1.1

Beginning-of-year position ....................................

pg no

2.1.1.1

Overview of legal structure ....................................

pg no

2.1.1.2

Overview of organisational structure ....................................

pg no

2.1.2

End-of-year position ....................................

pg no

2.1.2.1

Overview Legal structure ....................................

pg no

2.1.2.2

Overview Organisational Structure ....................................

pg no

2.2

Organisational description with indication of the primary business activity of key entities ....................................

pg no

2.3

Products & services ....................................

pg no

2.4

History of the group ....................................

pg no

2.5

Business strategies ....................................

pg no

2.5.1

General ....................................

pg no

2.5.2

Changes in business strategy ....................................

pg no

3

Industry Analysis ....................................

pg no

3.1

Introduction to [xx] industry ....................................

pg no

3.1.1

A global market ....................................

pg no

3.1.2

Market trends ....................................

pg no

3.1.3

Customers ....................................

pg no

3.1.4

Market structure ....................................

pg no

3.1.5

Competition ....................................

pg no

3.1.6

Key demand determinants ....................................

pg no

3.1.7

Technology ....................................

pg no

3.1.8

Barriers to entry ....................................

pg no

3.1.9

Government regulation ....................................

pg no

3.2

Summary of relevant findings ....................................

pg no

4

Functional Analysis ....................................

pg no

4.1

List of controlled transactions ....................................

pg no

4.2

Invoice flow chart ....................................

pg no

4.3

Indication of transactions aggregated ....................................

pg no

4.4

Headquarters ....................................

pg no

4.4.1

Introduction ....................................

pg no

4.4.2

General management ....................................

pg no

4.4.3

Research and development ....................................

pg no

4.4.4

Branding and marketing ....................................

pg no

4.4.5

Funding and treasury ....................................

pg no

4.5

Manufacturing entities ....................................

pg no

4.5.1

Functions ....................................

pg no

4.5.1.1

Engineering ....................................

pg no

4.5.1.2

Procurement ....................................

pg no

4.5.1.3

Project planning ....................................

pg no

4.5.1.4

Quality control ....................................

pg no

4.5.1.5

Production ....................................

pg no

4.5.2

Risks ....................................

pg no

4.5.2.1

Warranty risks ....................................

pg no

4.5.2.2

Inventory risks ....................................

pg no

4.5.2.3

Product liability ....................................

pg no

4.5.2.4

Credit risks ....................................

pg no

4.5.2.5

FOREX risks ....................................

pg no

4.5.2.6

Capacity risks ....................................

pg no

4.5.3

Assets ....................................

pg no

4.5.3.1

Production-related tangible assets ....................................

pg no

4.5.3.2

Trade intangibles ....................................

pg no

4.6

Sales entities ....................................

pg no

4.6.1

Functions ....................................

pg no

4.6.1.1

Sales ....................................

pg no

4.6.1.2

Marketing ....................................

pg no

4.6.1.3

Service ....................................

pg no

4.6.1.4

Logistics ....................................

pg no

4.6.2

Risks ....................................

pg no

4.6.2.1

Inventory risks ....................................

pg no

4.6.2.2

Credit risks ....................................

pg no

4.6.2.3

Market risks ....................................

pg no

4.6.2.4

FOREX risks ....................................

pg no

4.6.2.5

Regulatory risks ....................................

pg no

4.6.3

Assets ....................................

pg no

4.6.3.1

Tangible assets ....................................

pg no

4.6.3.2

Marketing intangibles ....................................

pg no

4.7

Shared services centre ....................................

pg no

4.7.1

Introduction ....................................

pg no

4.7.2

Financial administration ....................................

pg no

4.7.2.1

Number of FTEs ....................................

pg no

4.7.2.2

Activities performed ....................................

pg no

4.7.2.3

Benefits provided ....................................

pg no

4.7.3

IT ....................................

pg no

4.7.3.1

Number of FTEs ....................................

pg no

4.7.3.2

Activities performed ....................................

pg no

4.7.3.3

Benefits provided ....................................

pg no

4.7.4

Human resources ....................................

pg no

4.7.4.1

Number of FTEs ....................................

pg no

4.7.4.2

Activities performed ....................................

pg no

4.7.4.3

Benefits provided ....................................

pg no

4.7.5

Quality assurance ....................................

pg no

4.7.5.1

Number of FTEs ....................................

pg no

4.7.5.2

Activities performed ....................................

pg no

4.7.5.3

Benefits provided ....................................

pg no

4.7.6

Technical support ....................................

pg no

4.7.6.1

Number of FTEs ....................................

pg no

4.7.6.2

Activities performed ....................................

pg no

4.7.6.3

Benefits provided ....................................

pg no

4.7.7

Marketing ....................................

pg no

4.7.7.1

Number of FTEs ....................................

pg no

4.7.7.2

Activities performed ....................................

pg no

4.7.7.3

Benefits provided ....................................

pg no

4.7.8

Business development ....................................

pg no

4.7.8.1

Number of FTEs ....................................

pg no

4.7.8.2

Activities performed ....................................

pg no

4.7.8.3

Benefits provided ....................................

pg no

4.7.9

Tax and legal ....................................

pg no

4.7.9.1

Number of FTEs ....................................

pg no

4.7.9.2

Activities performed ....................................

pg no

4.7.9.3

Benefits provided ....................................

pg no

4.7.10

Centralised procurement ....................................

pg no

4.7.10.1

Number of FTEs ....................................

pg no

4.7.10.2

Activities performed ....................................

pg no

4.7.10.3

Benefits provided ....................................

pg no

4.8

Conclusions and responsibility profiles ....................................

pg no

4.8.1

Headquarters ....................................

pg no

4.8.2

Production companies ....................................

pg no

4.8.3

Distribution centres ....................................

pg no

4.8.4

Sales companies ....................................

pg no

4.9

Changes in functionality in the course of the year ....................................

pg no

5

Transfer Pricing Policy ....................................

pg no

5.1

Introduction ....................................

pg no

5.2

Choice of method per inter-company transaction ....................................

pg no

5.2.1

Sale of goods ....................................

pg no

5.2.2

Licensing of technology ....................................

pg no

5.2.3

Licensing of brand ....................................

pg no

5.2.4

Centralized support services ....................................

pg no

5.2.4.1

Benefit test ....................................

pg no

5.2.4.2

Identification of potential market references and choice of transfer pricing method ....................................

pg no

5.2.4.3

Allocation schedule for costs of providing intra-group services ....................................

pg no

5.2.5

Loans ....................................

pg no

5.2.6

Guarantees ....................................

pg no

5.2.7

Transfer of capital assets ....................................

pg no

5.2.8

Price adjustments ....................................

pg no

5.2.9

Explanation of losses ....................................

pg no

APPENDIX — GENERAL DOCUMENTS

1. Transfer Pricing Policy Statement

2. List of Inter-Company Agreements

3. List of Tax Rulings and Advance Pricing Agreements

4. List of Cost Contribution Agreements

5. List of Transaction Amounts Per Controlled Transaction and Related Party

6. Financial Overview for the Taxpayer and the Related Parties with Whom Controlled Transactions Took Place Showing Turnover and Operating Profit for the Latest Three years

7. Other Documentation Required under China Transfer Pricing Documentation Regulations