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China: Country-by-country reporting compliance burden for certain outbound MNEs alleviated

China: CbC reporting compliance burden

China has activated country-by-country (CbC) reporting and exchange relationships with 44 countries, with an expansion of China’s current exchange relationship with the United Kingdom, France, and Germany.

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For Chinese outbound multinational enterprises (MNEs), the expanded CbC report exchange network means that more companies will not need to perform local CbC report filings. This may alleviate the burden on certain MNEs with respect to their global tax compliance management.

Status of CbC report exchange relationships

China currently has activated CbC report exchange relationships with 44 countries—Argentina, Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Russia, Singapore, Slovak Republic, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, and United Kingdom. 

Of these countries, Cyprus and Romania are “non-reciprocal jurisdictions” (i.e., they have committed to send CbC reports to China but will not receive CbC reports from China). 

China is expected to exchange CbC reports in 2019 for tax years beginning on or after 1 January 2017. 

KPMG observation

Many countries—including China—have integrated the CbC reporting information into the tax risk monitoring and management system, and it is expected that this would lead to more risk assessments in the future. MNEs need to consider treating their CbC reporting obligations with diligence and care; determining that the CbC reporting is a true and fair representation of the groups’ financial positions and operations; and rigorously examining any potential risks that could be highlighted by their CbC data.

For existing risks, MNEs need to consider taking steps to mitigate such risks, including providing further support in transfer pricing documentation and/or considering refinement of the global operating structures and global transfer pricing policies—such as improving substance in weak spots, winding down non-compliant structures, or restructuring certain transactions to bring them into compliance, for example.  

  • MNEs may need to regulate their corporate governance and manage their global transfer pricing risks by establishing arm’s length transfer pricing policies. 
  • MNEs also need to allocate the functions, risks, assets and personnel in each country, and align tax outcomes with value creation.
  • In tax jurisdictions where high transfer pricing risks exist, MNEs may also want to consider advance pricing agreements (APA) and other bilateral or multilateral instruments to mitigate their transfer pricing risks.

 

Read a November 2018 report prepared by the KPMG member firm in China

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