In response to developments in international anti-tax avoidance and information exchange, on November 13, 2017, the Ministry of Finance (MOF) of the Republic of China (the "ROC") issued amendments to the Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm's-Length Transfer Pricing (hereinafter referred to as the "TP Assessment Regulations") to implement recommendations in Action 13 of the Organization for Economic Co-operation and Development's (OECD) Action Plan on Base Erosion and Profit Shifting ("BEPS"), namely, three-tiered transfer pricing documentation consisting of master files, local files (hereinafter referred to as "Transfer Pricing Reports"), and country-by-country reports (hereinafter referred to as "CbC Reports"). On December 11, 2017, in consideration of international norms, external opinions, and national conditions, the MOF also issued safe harbor thresholds for the submission of master files and CbC Reports in accordance with the TP Assessment Regulations. The new regulations will apply starting from the 2017 income tax returns. Below is a summary of the three-tiered transfer pricing documentation and Lee & Li's observations for the reader's reference.

Summary of three-tiered transfer pricing documentation

 

Master File

Transfer Pricing Report

CbC Report

Content

Overview of the multinational enterprise ("MNE") group, including the group's organizational structure, business activities, intangible assets, intercompany financing transactions, and financial and tax positions, etc. (Article 21-1)

Details of whether the controlled transactions undertaken by a domestic entity were conducted at arm's length, including information on the MNE group's organizational and management structure, a summary of the controlled transactions, and an analysis of the controlled transactions, etc. (Amended Article 22)

Information on the MNE group's profit distribution, main operating activities, and income tax positions in various tax jurisdictions. (Article 22-1)

Language

In general, the master file should be in Chinese. If the master file is in English, a Chinese translation of the file may be provided within one month of receipt of the taxation authority's written notice requesting the translation. (Article 21-1)

In general, the Transfer Pricing Report should be in Chinese. If the report is in a foreign language, a Chinese translation should also be submitted. However, if the taxation authority agrees, the entity may submit the report in English. (Amended Article 22)

Not specified.

Safe harbor threshold

To be exempt from submitting a master file, a domestic entity that is a constituent of an MNE group must have (i) annual net operating and non-operating income totaling less than NTD3 billion in thecurrent year, or (ii) annual cross-border controlled transactions (i.e., the total absolute amount of revenue or expenses from cross-border controlled transactions undertaken by the entity, irrespective of the type of transaction) totaling less than NTD1.5 billion in the current year. (MOF ruling no. 10604700690)

The threshold remains the same as under previous regulations, i.e., a domestic entity with an annual net operating and non-operating income totaling less than NTD300 million in thecurrent year is exempt from submitting the Transfer Pricing Report. (MOF ruling no. 09704555160)

In line with the OECD's recommended threshold, a domestic entity is exempt from submitting the CbC Report if

it is a constituent of an MNE group with less than NTD27 billion (i.e., the NTD equivalent of the OECD's recommended threshold of EUR750 million) in consolidated group revenue (i.e., all revenue disclosed in the consolidated financial statements prepared by the ultimate parent entity ("UPE") in accordance with the accounting principles of the UPE's jurisdiction, including operating income, other income, and non-operating income) in the preceding year. (MOF ruling no. 10604700690)

Reporting entity

A domestic entity that is a constituent of an MNE group is responsible for submitting the master file. However, if there are two or more domestic constituent entities in the same MNE group, then the MNE group may designate one of such entities to submit the master file.  (Article 21-1)

A domestic entity that has undertaken controlled transactions. (Amended Article 22)

1.     If the UPE or the surrogate parent entity appointed by the MNE group to submit the CbC Report on behalf of the UPE ("SPE") islocated in the ROC, then the UPE or the SPE is responsible for submitting the CbC Report;

2.     If the UPE or the SPE is located outside the ROC, and the ROC taxation authority is unable to acquire the CbC Report through information exchange conducted in accordance with agreements entered into between the ROC and the UPE or the SPE's tax jurisdiction (i.e., tax treaties, information exchange agreements, or agreements between competent authorities), then the domestic entity is responsible for submitting the CbC Report. However, if there are two or more domestic constituent entities in the same MNE group, then the MNE group may designate one of such entities to submit the CbC Report. (Article 22-1)

Required disclosures on income tax returns

The domestic entity appointed by the MNE group to submit the master file. (Amended Article 21)

Information regarding affiliated enterprises and related parties, as well as transactions between the entity and such affiliated enterprises and related parties. (Amended Article 21)

(i) The UPE, (ii) the domestic entity appointed by the MNE group to submit the CbC Report, or (iii) the SPE. (Amended Article 21)

Preparation deadline

At the time the income tax return is filed (e.g. the 2017 report should be prepared by May 2018 when the 2017 income tax return is filed). (Article 21-1)

At the time the income tax return is filed (e.g. the 2017 report should be prepared by May 2018 when the 2017 income tax return is filed). (Amended Article 22)

Not specified.

Submission deadline

Within one year of the end of the fiscal year (e.g. the 2017 report should be submitted by the end of 2018). (Article 21-1)

Within one month of receipt of the taxation authority's written notice of investigation. (Amended Article 22)

Within one year of the end of the fiscal year (e.g. the 2017 report should be submitted by the end of 2018). (Article 22-1)

Lee & Li's Observations

As the master file includes an overview of the MNE group's global operations, and the CbC Report includes the MNE group's profit distribution, main operating activities, and income tax positions in various tax jurisdictions, if a domestic entity is a member of an MNE group, it should inform the group's headquarters of the new ROC regulations as soon as possible in order to enable the headquarters to reassess the group's business activities, intercompany financing transactions, and financial and tax positions, etc., and so reduce the group's tax compliance risk. 

The safe harbor threshold for the master file is lower than that for the CbC Report. Thus, if an UPE is a tax resident of the ROC and safe harbor requirements mean the group is exempt from submitting a CbC Report, in order to ensure the group fulfills its reporting obligations, it should determine whether it has to submit the master file.