Transfer Pricing News Issue 36 - August 2021

New simplified procedure for unilateral APAs introduced

China's State Taxation Administration (STA) released Announcement No. 24 (2021) on 26 July 2021 that introduces a simplified procedure for certain taxpayers to obtain a unilateral advance pricing agreement (APA). The announcement and the STA’s interpretation of the announcement are effective as from 1 September 2021 and will apply alongside the STA’s guidance issued in 2016 (Announcement No. 64) on the general procedure to obtain an APA.

Announcement No. 24 simplifies and expedites the APA procedure. The introduction of the simplified procedure is viewed as another step to reform the STA’s tax collection and management practices and reflects the STA’s determination to improve tax services and protect taxpayer rights and interests.

Overview of the simplified APA procedure

Announcement No. 24 simplifies the unilateral APA application procedure by reducing the number of phases and establishing deadlines for the SAT conclude an APA. For example, under Announcement No. 64, there are six phases of the APA application procedure. The simplified APA application procedure has only three phases (evaluation of the application, negotiation and signing, and monitoring implementation); four of the phases from Announcement No. 64 (preparatory talks, negotiation intention, analysis and evaluation, and formal application) are consolidated into the application evaluation phase. Announcement No. 24 also sets time limits of 90 days and six months for the Chinese tax authorities to complete the first and second phases of the application process (application evaluation and negotiation and signing), respectively, which should streamline the process, reduce administrative burdens, and mitigate tax and regulatory uncertainty concerns for taxpayers. An APA will be effective for the three to five-year period after the date the official offer letter is issued by the STA.

Flow chart of the simplified unilateral APA application procedure

To qualify for the simplified APA procedure, an enterprise must have related party transactions exceeding RMB 40 million in each of the three years preceding the year the APA application is submitted and satisfy one of the following conditions:

  1. The enterprise submitted contemporaneous documentation to the tax authorities in line with Announcement No. 64 for the three years before the year of application;
  2. The enterprise concluded an APA within the previous 10 tax years that has been implemented in accordance with the terms of the arrangement; or
  3. The enterprise was subject to a special tax investigation and an adjustment by the tax authorities within the past 10 years, but the case has been closed.

The STA’s Interpretation of the Announcement states that if an enterprise does not fulfill condition No. 1, it can still become qualified to use the simplified procedure by voluntarily submitting contemporaneous documentation for the last three years before it applies for the simplified procedure.

The STA will reject an application if the enterprise meets any of the following circumstances:

  • The enterprise was subject to a special tax investigation and an adjustment by the tax authorities within the past 10 years and the case has not been closed.
  • The enterprise failed to complete the annual related party transaction forms and corrections in a timely manner;
  • The enterprise failed to prepare, preserve and submit contemporaneous documentation in accordance with the relevant regulations;
  • The enterprise failed to provide relevant materials in accordance with the requirements of Announcement No. 24 or the materials provided do not meet the requirements of the tax authorities, and the enterprise does not make corrections in a timely manner; or
  • The enterprise refuses to conduct a functional and risk interview with the tax authorities.

The simplified APA procedure also does not apply to unilateral APAs involving the tax authorities of two or more provinces, autonomous regions, municipalities directly under the central government and specific cities.

According to the STA’s Interpretation of the Announcement, if the enterprise and the tax authorities are unable to reach an agreement and the simplified APA application is withdrawn, the enterprise cannot re-apply for the simplified procedure. It will need to use the general APA procedure under Announcement No. 64, although documentation that already was submitted for the simplified procedure need not be resubmitted for the general procedure. In addition, if a unilateral APA is terminated because the taxpayer’s situation (i.e., related party transactions, funds, risks, etc.) substantially changed during the APA implementation period, the taxpayer may apply for a unilateral APA using the simplified procedure (provided the taxpayer otherwise meets the requirements for the simplified procedure).

Gordon Gao

Emily Li