By Grace Lin, Head of Tax, Cuatrecasas, Shanghai
The Chinese state taxation authority designed a simplified procedure for applying for a unilateral advance pricing arrangement (APA), which was announced in Notice No. 24/2021 on July 30 and will be implemented from September 1.
Companies that are interested in signing a unilateral APA to increase tax certainty on their related-party transactions will be able to take advantage of the new simplified procedure once it is implemented.
The general procedure for applying for an APA in China – whether unilateral, bilateral, or multilateral (based on the number of tax authorities involved) – includes six steps: pre-filing meeting, letter of intent, analysis and evaluation, formal application, negotiation and signing, and implementation and monitoring.
The simplified procedure cancels the pre-filing meeting step and consolidates into one step the letter of intent, analysis and evaluation, and formal application steps. This condenses the whole process into three steps: application and evaluation, negotiation and signing, and implementation and monitoring.
Improving APA processing efficiency
The China APA Annual Report (2019), released in October 2020, shows that from 2005 to 2019, China signed 101 unilateral APAs, accounting for 57% of all APAs signed. On average over these years, 89% of the unilateral APAs were entered into within two years and 52% within one.
However, the 2019 statistics show signings slowing down. Of the 12 unilateral APAs (including one renewal) signed in 2019, 50% were signed within two years and 17% within one. The longer closing times are due to a significant increase in applications in recent years, the complexity of transfer pricing issues, and the tax authorities’ limited resources.
To improve the efficiency of processing unilateral APAs, the state taxation authority designed this simplified procedure to streamline the application steps and stipulate the processing schedule.
Within 90 days after receiving an application, the Chinese tax authorities will conduct an analysis and interview to decide whether to accept the case. Once accepted, the tax authorities and the applicant will negotiate and, if the parties come to an agreement, sign the unilateral APA within six months. This means that, by applying the simplified procedure, a unilateral APA will be signed within nine months, which is much faster and more certain in terms of timing than the general procedure.
The unilateral APAs signed under the simplified procedure will apply to related-party transactions in the three to five years following the tax year in which the tax authorities accept the case, the same as under the general procedure.
Application requirements
To qualify for the simplified procedure, an applicant must have related-party transactions of more than CNY 40 million (approximately USD 6.2 million) for the three years before the tax year in which the tax authorities accept the case.
In addition, to qualify applicants must meet one of three conditions. One, the applicant must have submitted the transfer pricing documentation to the tax authorities in accordance with the law for the three years before the year of filing the application. Two, the applicant must have implemented an APA in the past ten years before the tax year of filing the application, and the implementation result must meet the APA requirements. Alternatively, three, the applicant must have been subject to a transfer pricing investigation by the tax authorities in the past ten years before the tax year in which the application is filed, and the investigation has been closed.
Ineligible applicants
Applications will not be accepted in certain situations.
An applicant will not be accepted that has been subject to a transfer pricing investigation or any other tax-related investigation by the tax authorities, and the investigation has not been closed.
In addition, an applicant that does not complete the annual report on related-party transactions according to law and fails to make corrections in due time will not be accepted.
Applicants that have failed to prepare, store, and submit the transfer pricing documentation also will not be accepted.
Furthermore, an applicant will not be accepted that has failed to provide the required materials or that has provided materials that do not meet the requirements of the tax authorities and failed to supplement or correct them in due time.
Finally, an applicant that refuses to cooperate with the tax authorities during the onsite interview on the applicant’s functions and risks will not be accepted.
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