By: Bill Ye Ma Xiaoyu King and Wood Mallensons Shanghai, China
The State Administration of Taxation (“SAT”) issued Bulletin 42 on 29 June 2016 to improve administration of related-party transaction reporting and contemporaneous documentation (“Bulletin 42”). With the first wave of comment behind us, many questions have emerged. Among the controversial provisions, Article 18 stands out It exempts enterprises transacting only with their domestic related parties from preparing master files, local files and special issue files. The new provisions will have a significant impact on taxpayers. So what is the trend of regulation of domestic related-party transactions under Bulletin 42?
Special provisions for domestic related-party transactions were first set out in the Measures for the Implementation of Special Tax Adjustments (for Trial Implementation), Guoshuifa  No. 2 (“Circular 2”). According to Circular 2, as a general rule, no transfer pricing adjustments need to be made to transactions between domestic related parties and eligible domestic enterprises, for example, those less than 50% foreign-owned whose related-party transactions are conducted with domestic affiliates only, may be exempt from preparing contemporaneous documentation.
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