Applicability of Contemporaneous Documentation Requirements to Toll Manufacturing Plants in Southern China

Most toll manufacturing plants (TMPs) in Southern China are established by the local governments and generally carry out their processing business under a tripartite agreement among the local government, a foreign company and the plant. Although there is no equity relationship between a TMP and a foreign company, the foreign company generally effectively manages and controls the TMP who receives a fee based on the costs and expenses of the TMP while the local government also receives an administration fee.

In January 2009, the State Administration of Taxation issued Implementation Regulations for Special Tax Adjustments ("STA Regulations", Guo Shui Fa [2009] No. 2), which requires enterprises that meet certain criteria to prepare contemporaneous transfer pricing documentation starting from calendar year 2008. Since the TMP arrangement in Southern China is unique as generally the plant itself is not a legal entity owned by the foreign principal, we discussed the issue with various tax authorities (including the provincial level authorities in Guangdong and the municipal authorities in Shenzhen, Zhuhai, Dongguan and Zhongshan) and have summarized our findings.

China Tax Analysis by Deloitte - June 26, 2009 (English, Chinese)