Country-by-Country (CbC) reporting is a system that allows tax authorities to gather information on the financial activities of multinational corporations (MNCs) operating within their jurisdictions. The purpose of CbC reporting is to improve transparency, offer tax authorities data to evaluate transfer pricing risks, and enhance compliance with tax laws. In China, CbC reporting requirements were introduced in 2016, and it applies to MNCs with a consolidated group revenue exceeding RMB 5.5 billion (approximately USD 850 million). In this blog post, we will discuss everything you need to know about the CbC reporting process in China.

Process and Requirements

To comply with CbC reporting requirements in China, MNCs must submit a CbC report to the Chinese tax authorities within 12 months after the end of their fiscal year. The report should include a comprehensive breakdown of the MNC’s operations and financial activities in each jurisdiction where it operates.

The report must include the following information:

• Revenues broken down by jurisdictions
• Profit or loss before income tax, broken down by jurisdictions
• Income tax paid and accrued, broken down by jurisdictions
• Capital, broken down by jurisdictions
• Accumulated earnings, broken down by jurisdictions
• Number of employees, broken down by jurisdictions
• Tangible assets other than cash and cash equivalents, broken down by jurisdictions

MNCs can submit their CbC reports to the Chinese tax authorities in one of two ways. The first way is to file the report directly with the State Administration of Taxation (SAT). The second way is to file the report through a Chinese entity that is part of the MNC group. If the MNC group has a Chinese entity, that entity should be responsible for filing the CbC report.

Penalties for Non-Compliance

Failure to comply with CbC reporting regulations in China can lead to significant fines and other sanctions. The penalty for not submitting or submitting the report late is a fixed fee of RMB 100,000 (approximately USD 15,500). However, this penalty may be waived if the Chinese tax authorities are convinced that the failure to file on time was due to reasonable circumstances.

Additionally, the Chinese tax authorities can impose penalties for providing incorrect, incomplete, or false information in the CbC report. The penalty for providing false or misleading information is RMB 100,000 per inaccuracy or false statement.

Confidentiality and Privacy

The information contained in the CbC report is considered confidential and is shared only with other tax authorities according to international agreements. However, the Chinese tax authorities may also disclose information to other government agencies or law enforcement agencies in specific situations.

It is essential to note that the Chinese tax authorities are committed to respecting privacy and confidentiality and have implemented measures to safeguard sensitive information. The Chinese tax authorities comply with the General Data Protection Regulation (GDPR) and other relevant legislation to ensure that personal and confidential information is not disclosed unlawfully.

Impact of CbC Reporting on Transfer Pricing

CbC reporting in China has significant implications for transfer pricing. Transfer pricing refers to the pricing of goods, services, and intangibles between related parties, such as different subsidiaries of an MNC group. MNCs often use transfer pricing to reduce their overall tax burden by shifting profits to lower-tax jurisdictions.

CbC reporting allows tax authorities to obtain a better understanding of MNCs’ transfer pricing practices and identify transfer pricing risks. If the tax authorities identify transfer pricing risks, they may launch transfer pricing audits, which can result in penalties and additional taxes owed.

Therefore, MNCs operating in China must ensure that their transfer pricing practices are compliant with Chinese tax laws and regulations. MNCs must also ensure that their CbC reports provide accurate

and comprehensive information regarding their transfer pricing practices to avoid potential penalties and audits.

CbC Reporting and BEPS Action Plan

CbC reporting is an essential component of the Base Erosion and Profit Shifting (BEPS) Action Plan, which is a global effort to tackle tax avoidance by MNCs. The BEPS Action Plan was developed by the Organisation for Economic Cooperation and Development (OECD) and G20 countries in response to concerns about MNCs using aggressive tax planning strategies to shift profits to low-tax jurisdictions.

CbC reporting requirements in China are aligned with the BEPS Action Plan’s recommendations and provide greater transparency and information exchange between tax authorities around the world. As part of the BEPS Action Plan, MNCs are also required to file CbC reports in other jurisdictions where they operate.

Conclusion

In summary, CbC reporting is an essential part of tax compliance for MNCs operating in China. MNCs must ensure that they comply with the CbC reporting requirements and provide accurate and comprehensive information in their CbC reports. Failure to comply with CbC reporting requirements can result in significant penalties and audits.

CbC reporting also has significant implications for transfer pricing, and MNCs must ensure that their transfer pricing practices are compliant with Chinese tax laws and regulations. The BEPS Action Plan reinforces the importance of CbC reporting in tackling tax avoidance by MNCs and provides greater transparency and information exchange between tax authorities around the world.

Overall, MNCs operating in China must stay up to date with the latest CbC reporting requirements and ensure that they comply with Chinese tax laws and regulations to avoid potential penalties and audits.