On Aug. 13, 2013, SAT officially announced “China Advance Pricing Arrangement Annual Report (2012)” in both Chinese and English. This is the fourth APA annual report released by the State Administration of Taxation (“SAT”). This report introduces China’s APA mechanisms, procedures and practices, and provides statistics for 2005 through 2012 accompanied by an analysis of the statistics.
一、 Introduction to APAs that China has signed
From 2005 to 2012, China has signed 56 unilateral APAs and 29 bilateral APAs, accounting for 66% and 34% of the total number of APAs in China respectively. So far China has not signed any multilateral APA. Below table summarizes the number of unilateral and bilateral APAs that the Chinese tax authorities signed during each of the 2005 to 2012 calendar years.
In 2012, a total of 3 unilateral APAs and 9 bilateral APAs were signed, the number of bilateral APAs representing a new all year high. The time taken for completing the APAs signed in 2012 was shorter than those signed in 2011: all unilateral APAs were completed within 2 years, 67% of which took less than 1 year; 67% of all bilateral APAs signed in 2012 were also completed within one year. Of the 9 bilateral APAs signed in 2012, 5 were signed with Asian countries, 1 was signed with European countries, and 3 were signed with North American countries, marking an all year high in terms of the bilateral APAs signed with non-Asian countries. Most of the APAs signed in 2012 still involve the manufacturing industry but we see a further diversification in the types of industries covered.
二、 Period of APA program operation
By December 31, 2012, the SAT has 79 APA requests that are yet to be officially accepted, 6 unilateral and 73 bilateral.
Practically, application with below factors will merit the SAT’s prioritized attention: (1) Overall principle: first come, first served; (2) The quality of the request submission, e.g. all required documents have been submitted, the transfer pricing method applied is appropriate, and the calculation is correct. Applying taxpayers will be required to make additions or revisions to the submission when necessary; (3) The applying taxpayer is in a specific industry or located in a specific region that merits prioritized attention; (4) For a BAPA request, whether the BAPA partner country has the intention to accept the case and pursue a BAPA will also be an important factor for consideration. Among the four factors, the one the SAT values most is the quality of the submission. A submission that presents innovative application of TP methods or high quality quantitative analysis for intangibles, cost savings or market premiums will merit the SAT’s prioritized attention.
After the formal application, below exhibit illustrates the time taken for unilateral and bilateral APAs signed by China in 2012:
As shown in the above exhibit, all unilateral APAs signed in 2012 were completed within 2 years, 67% of which took less than 1 year; 67% of all bilateral APAs signed in 2012 were also completed within one year.
三、 APA Process
The APA application and administration process involves the following six stages: (1) Pre-filing meeting; (2) Formal application; (3) Examination and evaluation; (4) Negotiation; (5) Signing; (6) Implementation and monitoring.
The following chart illustrates the process:
四、 Tax benefits of APA
An APA is a voluntary agreement conducted on the basis of equality and mutual trust. It provides an effective way to enhance understanding, strengthen collaboration, and mitigate disputes between enterprises and tax authorities. APAs have the following benefits:
(1) Provide certainty for tax authorities and enterprises in regards to transfer pricing issues for future years, which will offer certainty with regard to taxpayers’ operations and relevant tax obligations and provide tax authorities with an expectation of stable revenue;
(2) Reduce tax authorities’ costs related to transfer pricing administration and audit as well as enterprises’ tax compliance costs by mitigating the risk of a transfer pricing audit; and
(3) Improve the tax compliance services provided by the tax authorities, facilitate the balanced development of administration and service, and assure taxpayers of the relevant rights and benefits.
Bilateral and multilateral APAs can also provide the following additional advantages:
(1) Facilitate communication and collaboration among the competent tax authorities of different jurisdictions; and
(2) Help enterprises avoid transfer pricing adjustments as well as double taxation risks in two (for bilateral APA) or more (for multilateral APA) tax jurisdictions.