China: Annual advance pricing arrangement (APA) report; statistics for 2019 and future considerations

China: Annual advance pricing arrangement (APA) report

The China advance pricing arrangement (APA) annual report for 2019 recapitulates information about the APA program in China, and highlights the determination of the State Taxation Administration to steadily promote the APA program and to improve the quality of services provided by the tax authorities to taxpayers.


The number of agreed and signed APAs in 2019 reflects a historical high, and the APA report for 2019 reveals new trends in terms of industry types, transaction types, and transfer pricing methods involved in the concluded APA cases. 


The tax authorities on 29 October 2020 published the 2019 APA annual report that summarises the latest implementation status of the APA program in China, and provides statistics on concluded APAs covering the period from 2005 to 2019.

  • Number of signed APAs: The Chinese tax authorities signed a total of 21 APAs in 2019, including 12 unilateral APAs and 9 bilateral APAs, with both achieving a historical record high since 2009. The 2019 statistics illustrate that more multinational enterprises (MNEs) are seeking the route of applying for APAs as a tool to obtain tax certainty and avoid double taxation. The 2019 APA statistics also reflect that the tax authorities regard the APA program as an important measure to serve taxpayers and accordingly have invested further resources to promote the program. 
  • Industries covered by signed APAs: Of the total APAs signed between 2005 and 2019, 141 APAs relate to the manufacturing industry, accounting for 80% of the total number. While the manufacturing industry forms a big chunk of the APA tally, it has been observed that in the past two years, there has been an increasing number of enterprises signing the APAs in the wholesale and retail industry (19 signed APAs or 10% of the signed APAs between 2005 and 2019). With the diversification of China's economy and further opening-up of the market, it is expected that the number of APAs involving the service industry and other types of industries could increase further in the future. 
  • Transaction types involved in the APAs: Between 2005 and 2019, 148 signed APAs relate to the transfer of the right to use or the ownership of tangible assets, accounting for 61% of all transactions types. An upward trend is seen in the number of signed APAs that involve the transfer of the right to use or ownership of intangible assets and services transactions, accounting for 96 signed APAs or 39% of the total. The promulgation of the Announcement of the State Administration of Taxation on the Administrative Measures on Special Tax Investigations, Adjustments and Mutual Agreement Procedures [2017] No. 6 (Announcement No. 6) requires taxpayers to emphasise the analysis of services and intangible assets related transactions, and this has prompted the Chinese tax authorities to further tighten the scrutiny on these related-party transactions. In turn, taxpayers have been encouraged to apply for APAs to secure tax certainty on these transactions (regarded as medium-risk to high-risk). 
  • Time taken to conclude the APAs: Generally, the Chinese tax authorities aim to conclude unilateral and bilateral APAs within 12 to 24 months of the submission of formal applications, respectively. Most unilateral APAs (89%) and bilateral APAs (62%) signed between 2005 and 2019 were concluded within two years of formal application. In 2019, most of the newly signed APAs were also concluded within two years of formal application. Five of the nine newly signed bilateral APAs in 2019 were concluded within only one year of formal application. This is viewed as showing the commitment of the tax authorities in providing for efficient APA negotiation and conclusion by means of building sufficient resources to manage the APA cases. 
  • Transfer pricing methods applied in the APAs: The APA report reveals that five of the newly signed APAs in 2019 adopted the profit-split method (which is equal to the total number of the APAs applying the same method from 2005 to 2018). It demonstrates that the Chinese tax authorities are actively trying to and have succeeded in applying the profit split method during the APA negotiation process, especially in cases where both parties to the transactions make significant contributions to value creation or cases involving location-specific advantages. 

KPMG observation

Looking ahead, uncertainty in the global economy due to the disruptions caused by the coronavirus(COVID-19) pandemic as well as challenges from certain trade policies is viewed as prompting governments around the world to increasingly compete for tax revenues. With such uncertainties, taxpayers seek an environment that provides fair and certain tax administration to facilitate cross-border investments. In this regard, the Chinese tax authorities are viewed as continuing with their efforts to improve the business environment and to promote unimpeded trade and investments in China, as evidenced by the efforts to steadily advance the APA program in providing certainty to taxpayers and to help avoid and prevent double taxation. 

It may be helpful for taxpayers to note the following with regard to categories of enterprises that might consider applying for an APA to manage their transfer pricing risks:

  • Enterprises undergoing value chain or business restructurings: Significant changes may occur to the business operations, functional profiles, distribution of intangible assets, corresponding related-party transactions, and profit levels of the parties to a business restructuring. Unsurprisingly, these changes could become the focus of local tax authorities and even the target of transfer pricing investigations. In particular, with the adoption of the profit-monitoring mechanism on MNEs across China, the possibility of relevant transfer pricing risk being identified by the tax authorities will further increase. Hence, enterprises that have undergone business restructurings can apply for APAs to manage their transfer pricing risk. The APA process provides taxpayers with the opportunity to communicate more transparently with the tax authorities on their operation changes as a result of the business restructurings, thereby allowing the tax authorities to attain a more comprehensive understanding of the corresponding tax implications and ultimately to allow for tax certainty.
  • Enterprises with a significant amount of related-party goods import: For enterprises importing a significant amount of tangible goods, the tax authorities’ main focus would be on whether the related-party import prices are too high, thereby causing an erosion to China‘s tax base. Conversely, the Chinese customs authorities would pay attention to whether the related-party import prices are too low, thereby resulting in lower import duties. The contrasting concerns of the two authorities add further difficulties to the management of transfer pricing arrangements of these enterprises. Of late, the Chinese tax and customs authorities have been actively exploring service innovation and are working towards establishing a cooperation framework to address these concerns. Enterprises could consider taking advantage of this cooperation by applying for an APA to manage the positions of the tax and customs authorities so as to avoid and reduce domestic double taxation. 
  • Enterprises with substantial related-party services and intangible assets transactions: Announcement 6 reflects the tax authorities’ focus on related-party services arrangements and intangible assets-related transactions. Generally, enterprises with large scale and complex arrangements involving these types of transactions are regarded as facing elevated transfer pricing risks. By proactively applying for an APA, these enterprises could have an opportunity to fully explain the business background, transaction structure, and pricing policy of these transactions to the tax authorities and to effectively manage the associated transfer pricing risks. 
  • Enterprises whose businesses are affected by COVID-19 pandemic: Certain industries—including retail, catering, and tourism sectors—have been directly affected by the COVID-19 pandemic. Business performance of many enterprises in these industries has been viewed as fluctuating wildly, thus casting a cloud of uncertainty over their future operations. Unfortunately, these enterprises with significant profit fluctuations would more likely be under the radar of the tax authorities, particularly if they operate as limited-risk entities. Under such circumstances, affected enterprises may consider applying for an APA so that they can communicate and explain the impact of the COVID-19 pandemic on their business operations to the tax authorities and possibly reach an agreement on the transfer pricing arrangements through an APA. Once tax certainty is secured, enterprises can then focus on their business recovery and future expansion. 

For more information, contact the Global Leader of KPMG’s Global Transfer Pricing Services:

Komal Dhall | +1 212 872 3089 |

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