Implementation of CbCR in China

published on october 15, 2018 / reading time approx. 3 minutes  

The implementation of Country-by-country Reporting ("CbCR") in China which basically follows the final report of the 13th Action Plan of BEPS, is clearly stipulated in the new transfer pricing ("TP") regulation, the Public Bulletin [2016] No.42. The CbCR mainly aims at the disclosure of income, taxation and certain measures of business activities of all group entities by country.

Reporting obligation

According to the regulation, the CbCR filing obligation in China mainly applies to Chinese ultimate shareholder with total income of the consolidated financials over RMB 5.5 billion. The regulation further defines the ultimate shareholder as the enterprise that is able to consolidate the financial statements of all group entities, yet cannot be consolidated into the financial statements of any enterprise. However, a Chinese subsidiary could also be appointed by the multinational enterprises ("MNEs") as the reporting entity for the CbCR and thus lays the CbCR reporting obligation of the group into China.

Further, it's noteworthy that CbCR might be required to be submitted in a TP investigation, if its ultimate holding company should prepare the CbCR according to the regulation of the jurisdiction it resides, however, the CbCR is not (successfully) exchanged to China. Currently, China has signed both the Multilateral Convention on Mutual Administrative Assistance in Tax Matters ("MCAA") and Tax Information Exchange Agreements ("TIEAs") for information exchange.

Reporting requirement

If a Chinese subsidiary is appointed as the reporting entity for the CbCR and its fiscal year is different from that of its ultimate shareholder, the CbCR should be submitted in line with the fiscal year that the ultimate shareholder has ended. For example, if the multinational group has a fiscal year ended on June 30^th which means by the corporate income tax filing on May 31^st in China, its fiscal year has not ended yet. In this case, the CbCR for the fiscal year from July 1^st 2016 to June 30^th 2017 should be reported by May 31^st , 2018.

Furthermore, the CbCR should cover the full fiscal year of the ultimate shareholder.

In addition, according to the official explanation notes for the CbCR filing issued by the Chinese tax authority, there is no requirement to make adjustments on the CbCR for differences resulting from accounting principles applied from tax jurisdiction to tax jurisdiction. The revenue, profit and tax reporting in the CbCR are not required to be reconciled to the consolidated financial statements of the group.

Tax risks to be detected by using the information in CbCR

OECD has released the CbCR Handbook on Effective Tax Risk Assessment to support countries in the effective use of the CbCR by incorporating them into a tax authority's risk assessment process¹_. It is worth noting that the Chapter 4 and the Appendix of the handbook provide a series of methods and indicators which help tax authorities to identify tax risks such as total revenue by employee/by tangible assets, profit before tax by employee/by tangible assets, pre-tax and post-tax return on equity, effective tax rate and related party revenue proportion.  Further, the handbook outlines 19 tax risk indicators that may be identified using CbCR, such as:

• enormous related party revenues in specific tax jurisdictions which are deemed as having BEPS risks,
• mismatching results which are not in line with comparables and market trends, 
• significant profit but lack of business substance/low tax payments,
• group structuring including the change of the location of the assets,
• intangible assets are separated from related activities within the group,
• group has marketing company located outside the key markets or group has procurement company located outside its key manufacturing locations;
• group includes entities with dual tax residence or no tax residence or reported stateless revenues,
• information provided in CbCR is not in line with the information provided by the local entity.

Given the increasing transparency between tax jurisdictions, we recommend MNEs to take a consistent approach in TP compliance to avoid potential conflicts between different tax jurisdictions and to avoid aggressive tax planning which may lead to the TP adjustments from various competent tax authorities on those profits originally transferred at the specific tax jurisdictions deemed as having high risks. MNEs could take this opportunity to examine its business activities/TP compliance status in different jurisdictions in order to identify any TP risks as pointed out by OECD and local tax authorities as well as to optimize global tax structure. Moreover, MNEs are recommended to pay close attention to the international tax development trends and prepare counter-measures against uncertainty.

¹ For more information, please refer to our publication "Handbook on Effective Tax Risk Assessment by using CbC Reporting and examples of potential tax risk indicators" dated October 26, 2017 on our website.