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China’s stringent transfer pricing documentation requirements present a significant challenge for multinational enterprises operating in the region. Despite the growing awareness of these compliance obligations, many companies still face recurring issues when preparing the required documentation. The rules—set forth by China’s State Taxation Administration (STA)—mandate that companies engaged in related-party transactions prepare and maintain contemporaneous documentation. This documentation, including the master file, local file, and special issue file, must be completed and submitted by June 30 of the year following the transaction year.
For companies involved in related-party transactions in 2024, documentation must be filed by June 30, 2025.
However, many firms continue to face significant compliance risks due to common pitfalls. In this article, we explore the major challenges and how companies can overcome them using practical, regulator-aligned approaches.
Key Pitfalls in Transfer Pricing Documentation
Despite the awareness of compliance obligations, many businesses still struggle with key pitfalls in the preparation of their transfer pricing documentation. Here are some of the most common risk points that can trigger audit concerns or penalties:
- Incomplete Disclosure of Required Information:
China’s transfer pricing regulations clearly specify the information that must be disclosed across the master file, local file, and special issue file. However, some businesses often omit required sections or fail to provide the level of detail necessary, putting them at risk of penalties. - Inconsistencies Across Documents and Data Sources:
Inconsistencies between the master file and local file, or discrepancies between the local file and financial statements, can significantly undermine the credibility of the documentation. For instance, when the disclosed financial data in the local file contradicts tax returns or financial statements, this discrepancy raises red flags for auditors. - Outdated Content:
Some enterprises recycle past years’ documentation without updating it to reflect current business conditions—including changes in shareholding structures, management organization, or the external business environment. This leads to inaccurate portrayals of the company’s actual situation. - Superficial Disclosures:
Transfer pricing documentation must demonstrate compliance with the arm’s length principle through in-depth industry analysis and functional risk analysis. However, many companies focus only on basic company profiles, neglecting essential details such as transaction substance, value contribution, or risk-bearing arrangements. - Lack of Proper Formalization:
Documentation that is not formally prepared (e.g., not in Chinese) or lacks the necessary company chops (stamps) and signatures from authorized representatives is also problematic. Additionally, failing to identify third-party intermediaries or their qualifications can lead to audit challenges.
Best Practices for Transfer Pricing Documentation
To ensure proper compliance and manage risks effectively, companies should adhere to the following best practices when preparing their local files and special issue documentation.
Local File Preparation
Enterprise Information:
In preparing the local file, it’s essential to present enterprise information clearly and concisely. Here are some of the most effective strategies:
- Functional Charts: Use visual charts to clearly present internal functions, responsibilities, and employee headcounts. This should be consistent with the company’s functional profile and value chain analysis.
- Shareholding Structure: If no master file is prepared, clearly present the company’s shareholding structure (up to the ultimate parent entity), highlighting the shareholding ratios and jurisdictions of registration.
- Organizational and Management Structures: In addition to a basic organizational chart, companies should provide details on the management structure, including reporting lines, office locations, and key responsibilities.
- Industry Context and Business Activities: The local file must accurately describe the company’s business sectors, core products, and value drivers, while taking into account any recent industry developments and policy updates.
- Financial Data by Business Line: Break down financial data (revenue, costs, expenses) by business line, product type, or division. Disaggregate data to make it easier for auditors to assess the company’s operations across different sectors.
Disclosures on Restructuring and Intangible Assets
A critical area for documentation is the disclosure of any corporate restructuring or intangible asset transfers. It is crucial to:
- Describe Restructurings: Document any corporate restructuring or intangible asset transactions that affect the company’s structure, operations, profitability, or risk profile.
- Assess Group-Level Impact: Even if certain restructurings do not directly involve the company, their impact on the enterprise should be evaluated and disclosed in the transfer pricing documentation.
Implications for Multinational Companies in China
China’s transfer pricing rules require companies to dedicate sufficient internal and external resources to ensure that their documentation is accurate, complete, and compliant with local tax laws. Multinational companies should view the preparation of transfer pricing documentation not as a mere filing task but as a strategic necessity to mitigate compliance risks and safeguard against potential audits.
As the June 30, 2025 deadline approaches, enterprises should proactively assess their documentation and take steps to address common pitfalls before they face unnecessary complications.
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