China: Proposal for simplified process for unilateral APAs
China: Simplified process for unilateral APAs
The State Administration of Taxation on 19 March 2021 issued a draft consultation document—known in English as "Announcement on matters concerning the application of simple procedures for unilateral advance pricing arrangements”—and a corresponding policy interpretation that would simplify the unilateral advance pricing agreement (APA) process.
Comments on the proposed unilateral APA simplified process are due on or before 18 April 2021.
Simplified process for unilateral APAs
The Chinese government in recent years provided measures to foster the business environment. As part of this effort, for companies with a high tax compliance, the APA system was made available to reduce the transfer pricing risk and to increase certainty with regard to business operations in China, while at the same time reducing the cost of tax administration.
Still, companies encountered challenges under the APA process—such as cumbersome negotiation and signing procedures for APA applications and a long period of time for acceptance and review of the APA applications by the tax authorities. In the regions of Shenzhen and Guangdong, pilot projects under a unilateral APA simplified process were completed. In order to improve the efficiency of unilateral APA negotiations, the State Administration of Taxation has proposed to implement the unilateral APA simplified process on a nationwide basis, based on the findings from the pilot projects in Shenzhen and Guangdong.
Under the simplified process for unilateral APAs, the draft consultation document:
- Clarifies that the simplified procedures would only be applicable with regard to unilateral APAs, and could not be applied to bilateral and multilateral APAs
- Targets for the simplified procedures companies with “high tax compliance” defined as an enterprise that:
- In the three tax years before the company's APA application period, the amount of connected transactions that occur each year is greater than RMB 40 million; and
- One of the following three elements is satisfied:
- At least three months before applying for the simplified procedure, the enterprise provides the tax authorities a report of contemporaneous information management (pursuant to Announcement No. 42 of 2016) for the most recent three tax years;
- An APA has been in place for the past 10 tax years, and there has been compliance with that APA; or
- The enterprise over the past 10 tax years has been subject to special tax investigation and adjustment by the tax authority, and the case has been closed.
The draft consultation document also clarifies that the tax authorities would not accept APA applications under the simplified process in certain situations, such as:
- During the APA application period, there have been substantial changes to corporate-related transactions, business environment, and functional risks (when compared with previous years).
- The taxpayer accepted a transfer pricing adjustment as implemented by the tax bureau, but the case has not yet been closed.
- The taxpayer company fails to fill in or incorrectly fills in the related business transaction report form or fails to prepare and submit the contemporaneous data in accordance with the regulations.
- The unilateral APAs involves the tax authorities of two or more provinces, autonomous regions or certain cities or municipalities.
- During implementation of the simplified APA process, the company undergoes a substantial change that leads to the termination of the APA (the company no longer qualifies for the simplified procedure, but can reapply for a unilateral APA under the general procedure in accordance with the provisions of Announcement 64).
The content of the application report under the simplified APA process basically would be consistent with the content required by the draft APA application as provided under Announcement 64, including a value-chain analysis, cost saving, market premium, and other considerations of special regional advantages.
Benefits under simplified APA process
The period for application of the unilateral APA simplified process would be three to five tax years. In addition, companies could elect retroactive application to prior years when submitting an application.
The simplified APA process would not affect the general rules under Announcement 64 for the management of APAs. The general procedures under Announcement 64 would coexist with the simplified process, and eligible enterprises could decide which rules to apply. The legal effects of unilateral APAs reached under either of the two procedures would be the same.
Under the unilateral APA simplified process, the process steps would be reduced. According to Announcement No. 64, the APA process under the general procedure is divided into six stages—preparatory meeting, negotiating intention, analysis and evaluation, formal application, negotiation and signing, and monitoring execution. The simplified APA process would reduce these six steps to three steps, and thus would be expected to accelerate the progress of the APA review.
The simplified APA process also would set clear deadlines for the tax bureau's procedures for accepting applications and then for evaluating and negotiating the APA. In theory, taxpayers could complete the process of applying for the negotiation and signing within a nine to twelve-month period.
Compared with the general APA process, the time required for the negotiation and signing of the APA would be significantly expedited. Read about the statistics of the APA process for 2019 (the most recent data available): TaxNewsFlash
For more information, contact the Global Leader of KPMG’s Global Transfer Pricing Services:
Komal Dhall | +1 212 872 3089 | firstname.lastname@example.org
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