D. Negotiation

For unilateral APAs, the tax authority will arrange negotiations and discussions with the enterprise after the tax authority reaches a position following its examination and evaluation process. If both parties can reach an agreement, the draft APA along with an examination and evaluation report will be submitted to the SAT for review and approval.

For bilateral or multilateral APAs, the SAT will arrange negotiations and discussions with the relevant competent authorities after each competent authority has completed its own review and evaluation process. If all parties agree, a draft APA should be prepared according to the memorandum of negotiation. A draft APA should include the following:

(1) Basic information of related parties such as names and addresses;

(2) Related party transactions and the years to be covered under the arrangement;

(3) The selected comparable prices or transactions, transfer pricing methodology and calculation methods, and financial projections in the arrangement;

(4) Definition of technical terms in relation to the transfer pricing applications and calculation basis;

(5) Critical assumptions;

(6) Obligations of the enterprise including annual reporting, record keeping, and notification of changes to the assumptions, etc.;

(7) Legal force of the arrangement, and confidentiality of documents and information;

(8) Provisions on mutual responsibilities;

(9) Revisions of the arrangement;

(10) Methods and approaches of dispute resolutions;

(11) Effective date; and

(12) Appendices.

E. Signing

For a unilateral APA, the legal representatives or representatives authorized by the legal representatives of both the tax authority and the enterprise officially sign the unilateral APA (see Appendix Ⅸ).

For a bilateral or multilateral APA, the representative authorized by the SAT and relevant competent tax authorities of the other tax treaty (or arrangement) party(ies) officially sign the bilateral or multilateral APA, and then according to the signed bilateral or multilateral APA, the in-charge tax authority signs a “Bilateral (Multilateral) APA Implementation Agreement” (see Appendix Ⅹ) with the legal representative or the representative authorized by the legal representative of the enterprise in accordance with the signed bilateral or multilateral APA.

F. Implementation and Monitoring

The enterprise shall maintain a complete record of relevant documents and information (including accounting records and other relevant records), and shall file an annual compliance report in relation to implementation of the APA to the tax authority within five months after the end of each year.

During the term of the APA, the tax authority shall regularly inspect the enterprise’s compliance. If actual operating results of the enterprise fall outside of the agreed range of prices or profits under the arrangement, the tax authority shall adjust the actual operating results to the agreed prices or profits in accordance with the APA. In the case of a bilateral or multilateral APA, such an adjustment shall be submitted to the SAT for approval.

During the term of the APA, if there are substantial changes that affect the implementation of the APA, the enterprise should report these changes to the tax authority in writing with a detailed explanation regarding the impact of these changes on the implementation of the APA within 30 days.

Based on the review of the enterprise’s operation, the tax authority will discuss with the enterprise and either revise the provisions and relevant conditions of the arrangement or terminate the arrangement, depending on the impact of the changes on the implementation of the APA.

3. Rollback

Negotiation and signing of the APA does not affect transfer pricing audits conducted and adjustments made by tax authorities on the enterprise’s related party transactions in the year during which the enterprise submits its formal written application or any prior year.

If the related party transactions in the year of application or any prior year are the same as or similar to those covered in the APA, subject to the enterprise’s application, the transfer pricing methodology and calculation method specified in the APA can be applied to the evaluation and adjustment of the related party transaction in the year of application or any prior year upon the tax authorities’ approval.

The rollback stipulation has the advantage of resolving many years of potential transfer pricing issues through the APA application process. The relevant regulations for transfer pricing investigations are applicable to the rollback period, as far back as 10 years.

4. Renewal

If the enterprise wants the APA to be renewed when it expires, it can file an application for renewal 90 days prior to the expiration of the APA to the tax authority, by submitting the “APA Renewal Application” (see Appendix Ⅺ). This application should also include reliable supporting evidence to confirm that there have been no substantial changes to the facts and conditions in the existing APA and that the enterprise has been in full compliance with the provisions and requirements of the existing APA.

Upon receiving the application for renewal, the tax authority will issue a “Reply Letter on the APA Renewal Application” (see Appendix Ⅻ) to the enterprise. The tax authority will subsequently review and evaluate the application documents, and negotiate with the enterprise to draft the new APA and complete the renewal process.

During the term of the APA, if the enterprise’s overall profit level stays below the median most of the time, where an arm’s length range is used, the tax authority may no longer accept an application for renewal of the APA.

5. Termination or Cancellation

An APA may be terminated or cancelled under any one of the following conditions:

(1) In case of any dispute between the in-charge tax authority and the enterprise during the term of the APA, if the dispute cannot be resolved after negotiation and discussion, it can be reported to the tax authority at the next higher level (or the SAT when a bilateral or multilateral APA is concerned) for mediation. The APA shall be terminated if the outcome of the consultation or determination of the tax authority at the next higher level or the SAT is not acceptable to the enterprise; or

(2) If there are substantive changes regarding the critical assumptions in the APA or the core business of the enterprise, the tax authorities may terminate the implementation of the APA, taking into consideration of the specific circumstances of the case.

(3) During the term of the APA, if the tax authority discovers that the enterprise withholds truth or refuses to implement the APA, the APA shall be cancelled, i.e. be regarded as void ab initio.

Ⅳ Protection of Taxpayers’ Rights

1. Confidentiality of Taxpayers’ Information

The enterprise may conduct pre-filing meetings with the tax authority to discuss relevant matters and the possibility of reaching an APA on an anonymous basis.

Both tax authorities and the enterprise have the duty to keep confidential all information obtained during the whole process of the APA including pre-filing meeting, formal negotiation, examination and analysis, among others.

2. Taxpayers’ Freedom of Contract

After formal negotiation and before signing of the APA, both the tax authority and the enterprise can suspend or terminate the negotiation.

In case where the tax authority and the enterprise fail to reach an agreement for an APA, the non-factual information of the enterprise such as various suggestions, inferences, ideas and conclusions obtained by the tax authority during discussions and negotiations shall not be used in future tax investigations of the transactions covered by the proposed APA.

In case of any disputes between the tax authority and the enterprise during the term of the APA, both parties shall try to resolve the dispute through negotiations and discussions. If the conclusion of the negotiation or mediation by the tax authority at the next higher level / the SAT is not acceptable to the enterprise, the APA shall be terminated.

If the enterprise wishes to renew the APA, it shall file an application for renewal to the tax authority 90 days prior to the expiration of the APA.

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