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China: Country-by-country reporting update; transfer pricing audit risks

China: Country-by-country reporting update

The February 2020 announcement of review by the Organisation for Economic Co-operation and Development (OECD) of the current country-by-country (CbC) reporting standard provides an opportunity to look at the status of CbC reporting in China and instances of transfer pricing audit risks.


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In China, the State Taxation Administration in 2016 issued Announcement No. 42 (2016), known in English as the “Announcement on transfer pricing contemporaneous documentation” that formally introduced the requirements for CbC reports with reference to the work of the OECD/G20 base erosion and profit shifting (BEPS) Action 13.

The State Tax Administration then in 2017 issued Announcement No. 46 (2017), known in English as the "Announcement on matters concerning country-by-country reporting” that indicated that the information exchange of CbC reports with other nations would be initiated starting from fiscal year 2017 and onwards.

Since then, it has been observed that most Chinese multinational enterprises (MNEs) have been able to complete the minimum requirements for CbC reporting, but it has also been noted that management associated with transfer pricing risks unveiled by the CbC reporting requirements may require further strengthening and improvement. In addition, there have been instances of transfer pricing audits triggered by CbC reporting in European countries and this has brought challenges to the cross-border transfer pricing risk management of MNEs.

For example, consider a transfer pricing audit case in Austria. Based on the data disclosed in the CbC report and other information obtained from other channels, the Austrian tax authorities perform a high-level tax risk assessment and decided to initiate a transfer pricing audit on an Austrian subsidiary of a Swiss MNE. Based on their investigation, the Austrian tax authorities concluded that the key value-creating activities actually took place in Austria, rather than as having been claimed by the MNE, that activities had been performed by the Swiss principal entity.

Another example of transfer pricing audit triggered by CbC reporting occurred in France. Based on a high-level tax risk analysis of the CbC report, the tax authorities in France launched a transfer pricing audit of a MNE and issued information requests to the constituent entities of the MNE located in more than 80 countries, further requesting that they provide detailed information on marketing spending, headcount, operating income, etc.

With the development of the BEPS Action 13 project, it is envisioned that number of tax queries or even transfer pricing audits could be triggered by CbC reporting. In response to the challenges, MNEs need to consider carefully reviewing the quality of relevant information disclosed in the CbC reports and reducing the chance of being audited for erroneous or improper disclosures. In addition, if the tax authorities propose a transfer pricing adjustment, MNEs need to consider exploiting available tools such as multilateral agreement procedures (MAP) and advance pricing agreement (APA) to mitigate the risk of international double taxation.

MNEs incorporated in Hong Kong or other regions with principal place of business in mainland China

Hong Kong SAR, the British Virgin Islands, the Cayman Islands, and certain other jurisdictions where Chinese entities would like to establish overseas investment structures have in place regulations, requiring domestic tax residents of MNEs either to notify or submit CbC reports locally. Accordingly, MNEs having a principal place of business is in mainland China but incorporated in other jurisdictions (such as Hong Kong) including intermediate holding companies and ultimate holding companies, need to pay close attention to the development of local tax legislation and fulfil the corresponding CbC reporting notifications and filing obligations on time.

The Hong Kong tax authorities issued a notice in the end of 2019 that the deadline for local filing CbC reports in Hong Kong for the 2018 can be extended. Accordingly, the deadline for qualified taxpayers to submit the 2018 CbC reports was extended to 31 March 2020.

If the Chinese and Hong Kong tax authorities can reach an agreement before 31 March 2020 on the automatically exchange CbC reports, MNEs that have submitted CbC reports in mainland China may be exempted from submitting the report in Hong Kong. At present, it is unclear whether such an agreement will be or can be reached. If the agreement cannot be timely reached, MNEs located in mainland China are obliged to submit the CbC report locally in Hong Kong through their Hong Kong affiliates.

Because the deadline of 31 March 2020 is fast approaching, MNEs need to pay close attention of the status of any potential arrangement between mainland China and Hong Kong for an automatic information exchange and need to be prepared for either outcome.

Issues concerning data measures and CbC report submission format

As taxpayers complete their CbC reports, they may often encounter various problems in reporting their data. For example, according to the current standards of CbC report, the financial data involved in Table 1 of the CbC report must be the aggregation of financial data of constituent entities in each jurisdiction, rather than consolidated financial data. Taxpayers, thus, have to question whether it is appropriate to change the aggregated data to consolidated data.

Moreover, the data measures of some items in the CbC report may be vague. For example, in Table 1 of the CbC report, it is not clear whether tangible assets and other items are to be included in income, and there also may be different views on appropriate measures of the items in practice.

In terms of the submission format of the CbC report, most overseas tax authorities require MNEs to submit CbC reports in XML format. The report format conversion also imposes additional compliance burdens on MNEs. During the report format conversion process, some basic information that may be beyond the scope of the current standard CbC report template is required.

For more information, contact the Global Leader of KPMG’s Global Transfer Pricing Services:

Komal Dhall | +1 212 872 3089 |

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