Ⅲ APA Procedures

1. Prerequisites to an APA Application

In general, an enterprise meeting all of the following three formal criteria may apply for an APA:

a) The annual amount of related party transactions exceeds RMB 40 million. The types of related party transactions include the following:

— Purchase, sale, transfer and use of tangible assets;

— Transfer or use of intangible assets;

— Financing transactions; and

— Provision of services.

b) The enterprise has complied with the related party disclosure requirements according to the law.

The taxpayer should submit the “Annual Reporting Forms for Related-Party Dealings of Enterprises of the People’s Republic of China” with the annual Corporate Income Tax return to the tax authority within 5 months of the year following the year of related-party transactions.

c) The enterprise has prepared, maintained and provided contemporaneous documentation in accordance with the requirements of Guo Shui Fa 〔2009〕 No. 2.

The taxpayer shall prepare, maintain, and, upon request by tax authorities, submit contemporaneous documentation regarding its related party transactions for each tax year. The contemporaneous documentation includes the enterprise’s organizational structure, business operations, related party transactions, comparability analysis and selection and application of the transfer pricing method.

The process of applying for and negotiating an APA requires substantial commitment of resources from both the tax authority and the enterprise. In order to use its limited resources more effectively and enhance efficiency, the Chinese tax authority in practice will give priority to APA applications made by the following types of enterprises:

a) Enterprises which have provided sufficient and complete information, actively cooperate with the tax authority’s examination and evaluation, and proactively submit a reasonable APA proposal;

b) Enterprises which have been investigated by the tax authorities for their transfer pricing policies.

In China, enterprises are not required to pay an application fee to the tax authority in order to apply for an APA.

2. APA Process and Implementation

The APA application and administration process involves the following six stages:

A. Pre-filing meeting

B. Formal application

C. Examination and evaluation

D. Negotiation

E. Signing

F. Implementation and monitoring

The following chart illustrates the process:

 

A. Pre-filing Meeting

Prior to the formal application for an APA, the enterprise should submit a letter of intent (“LOI”) to apply for an APA to the tax authority. When applying for a bilateral (or multilateral) APA, the enterprise must submit LOIs to both the SAT and the in-charge local tax authority.

The in-charge tax authority (or the SAT in the case of a bilateral or multilateral APA), may conduct a pre-filing meeting with the enterprise to discuss relevant matters and the feasibility of reaching an APA, and complete an “APA Meeting Record” (see Appendix Ⅰ). During the pre-filing meeting, the tax authority will discuss with the enterprise based on the type of the APA application.

(1) Contents of the pre-filing meeting

If the enterprise applies for a unilateral APA, the following topics will generally be discussed in the pre-filing meeting:

a. Years to be covered under the arrangement;

b. Related parties involved and related party transactions to be covered under the arrangement;

c. Overview of the enterprise’s business operations in prior and future years;

d. Functional and risk profiles of related parties involved in the APA application;

e. Whether the methodology in the arrangement would be applied to resolve transfer pricing issues in prior years; and

f. Any other situations requiring explanation.

If the enterprise applies for a bilateral APA or multilateral APA, the following areas shall be discussed in addition to the items above:

a. Any request by the enterprise for arrangement of a pre-filing meeting with relevant competent tax authority or authorities involved in the APA;

b. Overview of business operations of related parties involved in the APA and their related party transactions in prior years; and

c. The transfer pricing methodology and calculation method of the APA proposed to the relevant competent tax authority or authorities involved in the APA.

(2) Form of the pre-filing meeting and follow-up matters

The pre-filing meeting can be held anonymously.

If the two parties form a consensus after the pre-filing meeting, the tax authority will issue the “Notice of Formal Meeting of the APA” (see Appendix Ⅱ) to the enterprise, and inform the enterprise to submit the formal application. If the pre-filing meeting does not lead to a consensus, the tax authority will issue the “Notice of Rejection of Enterprise’s Application for APA” (see Appendix Ⅲ) to the enterprise along with rejection reasons.

The tax authority will consider the following factors when making a decision as to whether to prioritize an APA request or not:

a. Overall principle: first come, first served;

b. The quality of the request submission, e.g. whether all required documents have been submitted, whether the transfer pricing method applied is appropriate, and whether the calculation is correct. Applying taxpayers will be required to make additions or revisions to the submission when necessary;

c. Whether the applying taxpayer is in a specific industry or located in a specific region that merits prioritized attention;

d. 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.

B. Formal Application

The enterprise shall submit the written application package to the tax authority within three months upon receipt of the “Notice of Formal Meeting of the APA” (see Appendix Ⅳ), and submit the “Formal Application Letter for APA” to the tax authority. For a bilateral or multilateral APA, the enterprise shall submit the “Formal Application Letter for APA” and the “Application to Initiate Mutual Agreement Procedures” (see Appendix Ⅴ) to both the SAT and the in-charge local tax authority.

The written application package of an APA should include the following:

(1) Descriptions of relevant group structure, internal organizational structure of the enterprise, related party relationships, and related party transactions;

(2) Financial and accounting reports of the enterprise for the most recent three years, and information on product performance and assets (including intangible and tangible assets);

(3) Types of related party transactions and tax years to be covered by the APA;

(4) Allocation of functions and risks among related parties, including the allocation criteria used such as entities involved, personnel, expenses, assets, etc.;

(5) Proposed transfer pricing methodology and calculation method in the APA, and the functional and risk analysis, comparability analysis and assumptions used for supporting such methodology and method;

(6) Description for market conditions, including industry development trends and competitive environment;

(7) Annual information on business scale, business performance forecasts and business plans for the period covered by the APA;

(8) Information regarding related party transactions in relevance, business arrangements and financial results such as profit levels, etc., involved in the arrangement ;

(9) Whether there are double taxation issues; and

(10) Relevant issues in relation to domestic and international laws and tax treaties.

Enterprises may apply for an extension to tax authorities relating to the submission of the formal written application package and submit the “Application for Extension of Submitting the Formal Application for APA” (see Appendix Ⅵ) under the following exceptional circumstances:

(1) Certain information requires special preparation;

(2) Certain information requires technical processing, such as translation; and

(3) Other non-subjective reasons.

The tax authority shall provide a written response to the enterprise and issue the “Reply to Application for Extension of Submitting the Formal Application for APA” (see Appendix Ⅶ) to the enterprise. If the tax authority fails to reply within the specified timeframe, it is deemed to have granted an extension to the enterprise.

When the enterprise applies for a bilateral (or multilateral) APA, the reports it submit to the two (or the respective) competent authorities should be consistent. If the application report is originally prepared in a foreign language, it should be fully translated into Chinese when submitted to the Chinese tax authorities with no deletions or abridgement. The relevant foreign-language contracts should also be translated into Chinese.

C. Examination and Evaluation

Upon receipt of the formal APA application package and other required documents, the tax authority will evaluate the documents and form a position within five months, and may request additional information from the enterprise during the evaluation process.

The scope of examination and evaluation conducted by the tax authority will mainly cover the following:

(1) Overview of historical operations;

(2) Functional and risk profiles;

(3) Comparable information;

(4) Critical assumptions;

(5) Transfer pricing methodology and calculation method; and

(6) Expected arm’s length price or profit range.

If needed, the tax authority will conduct an on-site audit to evaluate the actual operation of the enterprise.

If the evaluations need to be extended due to special factors, the tax authorities should formally inform the enterprise, and issue the “Notice of Extension of Examination and Evaluation of APA” (see Appendix Ⅷ). The delay should not exceed three months.

This article is released in the State Administration of Taxation of ThePeople’s Republic of China , If you have any questions please contact with us via email: newsletters@minterpku.com, or dial the number: + 86 10 5900 9170