China Pushes Ahead with Localisation of BEPS Actions

October 28 2015
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China's State Administration of Taxation (SAT) has been busy during recent months pushing ahead with its own plans to update/revise a series of domestic tax laws and regulations as well as Sino-foreign tax treaties. The most prominent of these changes is a proposed update of Circular Guoshuifa 2009 No.2 (Circular 2), the so-called “Master Guide” to Chinese transfer pricing. For the proposed update of Circular 2, the SAT has just released a discussion draft of "Implementation Measures of Special Tax Adjustment", which makes direct reference to various draft recommendations proposed in the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plans. 

Tax payers should take note of the following significant changes:

  • Clearer and broader definition of related parties;
  • Enhanced compliance documentation requirements (3 tier approach: MasterFile, Local File, & Special Documentation such as CBCR, together with specific documentation requirements for cost sharing, services, and thin capitalisation);
  • A new 'value creation attribution method' in addition to the five traditional TP methods referred to in the existing Circular 2;
  • New guidance on intangibles and intra-group service;
  • Enhanced guidance on the Controlled Foreign Corporation rule, thin capitalisation, and general anti-avoidance;
  • A requirement for local tax authorities to establish a risk ranking mechanism to consider related party transactions, closely monitor taxpayers’ real-time profit levels, conduct special tax investigation on those taxpayers with a low compliance level but a high tax risk ranking, and close monitoring of taxpayers which have already been subject to special tax adjustments; and​
  • A more standardised “special tax adjustment investigation” procedure.


This is yet another example of the impact the OECD BEPS project is having in triggering ambitious reforms in many national tax systems. We expect an avalanche of such National initiatives over the coming months once BEPS is finalised in October. 

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