SAT Bulletin [2016] No. 42, issued by China’s State Administration of Taxation (SAT) on June 29, 2016, introduced significant changes to China’s transfer pricing compliance requirements. Here are the key aspects of this bulletin:

New Documentation Framework

Bulletin 42 established a three-tiered documentation structure, aligning with the OECD’s BEPS Action 13 recommendations:

1. Master File
2. Local File
3. Special Issue File

This replaced the previous single-tier documentation system under Circular 2.

Country-by-Country (CbC) Reporting

The bulletin introduced CbC reporting requirements for certain taxpayers:

• Chinese resident enterprises that are the ultimate parent of a multinational group with consolidated revenue exceeding RMB 5.5 billion in the previous fiscal year
• Chinese resident enterprises nominated as the reporting entity by the multinational group

Related Party Transaction (RPT) Reporting

Bulletin 42 expanded the RPT reporting forms from 9 to 22 tables, including the CbC report. These forms must be submitted with the annual income tax filing.

Documentation Thresholds and Deadlines

The bulletin set new thresholds for preparing transfer pricing documentation and revised submission deadlines:

• Local File and Special Issue File: Must be completed by June 30 of the following year
• Master File: Must be completed within 12 months after the close of the group’s ultimate holding company’s fiscal year

Focus on China-Specific Issues

Bulletin 42 requires analysis of China-specific factors in transfer pricing documentation, such as:

• Location-specific advantages
• Value chain analysis
• Intangibles

Effective Date

The new requirements apply retroactively from January 1, 2016.

Impact on Multinational Companies

Bulletin 42 significantly increases the compliance burden for multinational companies operating in China. It requires more detailed disclosures and analysis, particularly regarding China-specific factors that may affect transfer pricing. Companies need to carefully review their transfer pricing policies and documentation to ensure compliance with these new requirements.This bulletin represents a major step in China’s implementation of the BEPS Action Plan and demonstrates the SAT’s commitment to strengthening transfer pricing regulations and enforcement.