Ⅴ Statistics

1. APAs Signed by Year

Exhibit 5-1 summarizes the number of unilateral and bilateral APAs that the Chinese tax authorities signed during each of the 2005 to 2011 calendar years.

China has signed 53 unilateral APAs and 20 bilateral APAs during this 7 year period, accounting for 72% and 28% of the total number of APAs in China respectively. So far China has not signed any multilateral APA.

As shown in the chart above, the number of unilateral APAs is decreasing year by year, while the number of bilateral APAs is generally increasing. From 2005 to 2008, more unilateral than bilateral APAs were signed every year. However, the number of bilateral APAs exceeded that of unilateral APAs in 2009 for the first time, representing the APA program’s principal component. In 2010, the number of bilateral APAs signed was equal to that of unilateral APAs. Of the 8 unilateral APAs signed in 2011, 4 are renewals, and 4 are signed for the first time, equalling the number of bilateral APAs signed for the first time in 2011. This indicates that taxpayers are attaching more importance to bilateral APAs and looking for ways to resolve bilateral international transfer pricing issues and avoid double taxation through the MAP process. It also reflects the SAT’s intensified effort in promoting the MAP program.

2. APAs by Phase

Exhibit 5-2 provides statistics of APAs by phase as of 31 December 2011.

①　There is a “Formal Application” phase that is not listed in this table since the tax authority’s acceptance of the formal application should be regarded as the start of the examination and evolution phase. The first meeting between the tax authority and enterprise in a unilateral APA or between the competent authorities in a bilateral or multilateral APA should be regarded as the start of the negotiation phase and the end of the examination and evaluation phase.

②　One of the cases in this category covers 26 legal entities.

The “Accepted Applications” category, as displayed in Exhibit 5-2, refers to APA applications which the tax authorities have accepted as submitted by the enterprises but where an agreement has not yet been achieved. Applications falling into this category are either under examination and evaluation or under negotiation. The other main category, “Concluded APAs”, includes APAs that have been agreed but not signed, APAs that are being executed and monitored, and APAs that have expired. China currently has 57 unilateral APAs in the “Concluded Applications” category, of which 4 are yet to be signed, 41 have expired and 12 are in effect. There are only 4 unilateral APAs under the “Accepted Applications” category, 1 in the pre-filing meeting phase and 6 in the proposal phase. Regarding bilateral APAs, 21 bilateral APAs have been concluded, of which 1 is yet to be signed, 11 have expired, and the remaining 9 are in effect. There are 27 bilateral accepted applications, including 15 under examination and evaluation and 12 under negotiation. 30 companies are having pre-filing meetings with the Chinese tax authority, and 21 other companies have submitted their intentions for a bilateral APA and are waiting in the line for their first pre-filing meeting with the tax authority to be arranged.

While far more unilateral APAs than bilateral APAs have been concluded, most concluded unilateral APAs were signed several years ago and have already expired, and a large part of the unilateral APAs in effect are renewals. In contrast, of the proposed and accepted APA applications, there are fewer unilateral than bilateral applications, suggesting that bilateral APAs are expected to increase significantly both in terms of number and workload in the coming years. As the Chinese tax authorities aim to steadily promote the APA program and to improve the quality of the APA examination work, we have devoted special effort to pre-filing examination. Therefore, many enterprises’ APA applications are still at the pre-acceptance stage.

3. APAs by Transaction Type

Exhibit 5-3 below illustrates the types of transactions involved in the accepted and concluded APAs as of 31 December 2011[1].

As shown in Exhibit 5-3, purchase and sale of tangible assets accounts for the largest portion of transactions covered by China’s APA program. Of the concluded APAs, 64% involve the purchase and sale of tangible assets, 18% involve the transfer of intangible assets, and 18% involve the provision of services. APAs involving the purchase and sale of tangible assets account for 45%, the largest proportion of accepted applications, although this is lower than the proportion of concluded APAs accounted for by this type of transaction. APAs involving the transfer or use of intangible assets and the provision of services account for 37% and 18% of accepted applications, respectively, which represents an increasing trend. These statistics indicate that most of the enterprises which have applied for APAs are manufacturing companies which are mainly involved in intercompany transactions related to the purchase and sale of tangible assets. However, based on the number of accepted applications and concluded APAs, it is anticipated that the number of APAs involving other types of transactions will increase rapidly in the future. As China’s tertiary industry develops, an increasing number of service companies may decide to apply for APAs. Thus, more APAs may involve transactions related to transfer or use of intangible assets, services and financing.

4. Bilateral APAs by Region

From 2005 to 2011, China has signed 15 bilateral APAs with Asian countries, 4 with a European country and 1 with a North American country. The following chart displays the percentage of bilateral APAs accounted for by each of these regions.

5. APAs by Time Taken

Exhibit 5-4 illustrates the time taken for unilateral and bilateral APAs signed by China in 2011.

As shown in Exhibit 5-4, 87.5% of China’s unilateral APAs and 75% of China’s bilateral APAs signed in 2011 were completed in two years or less, while 50% of each are completed within 1 year.

Exhibit 5-5 illustrates the time taken for the unilateral and bilateral APAs signed by China from 2005 to 2011.

As shown in Exhibit 5-5, 53% of China’s unilateral APAs were completed within one year, 45% were completed within one to two years while 2% took two to three years. While Bilateral APAs generally take more time, 55% were completed within one year, 20% took one to two years, 20% took two to three years, and the remaining 5% were completed in more than three years.

The time required to complete the entire APA process depends on many factors including the type of APA (i.e. unilateral, bilateral, or multilateral), the complexity of issues involved, the quality of the 25 Ch ina Ad vance Pricing Arrangement Annual Rep ort (2011)

documents provided by the enterprises, the efficiency of the tax officers’ review process, and the extent of the enterprise’s cooperation (e.g. timely provision of information).

The Chinese tax authorities generally aim to complete the review and negotiation process within 12 months for unilateral APAs and within 24 months for bilateral APAs. Bilateral APAs involve negotiations with relevant competent authorities through the MAP process and therefore require more time to reach a consensus than unilateral APAs do.

6. APAs by Transfer Pricing Method

The chart below shows the transfer pricing methods applied in the unilateral and bilateral APAs signed 2005 to 2011[2].

The data indicates that the transactional net margin method (TNMM) is the most commonly used transfer pricing method, being used in 52, or 67%, of signed APAs. The most commonly used profit level indicators are the Return on Sales ratio (used in 28 APAs) and the Full Cost Mark-up ratio (used in 24 APAs). Recently, the Chinese tax authorities have frequently used public data, which explains why the TNMM is the most commonly used method in the signed APAs. Moreover, the TNMM is also used to determine the routine profit when applying a residual profit split method.

The second most popular transfer pricing method is the cost plus method, being used in 16 of the concluded APAs. The other transfer pricing methods are applied less frequently. The comparable uncontrolled price (CUP) method is used in 4 cases; the resale price method in 1 case; the profit split method in 2 cases; and other methods in the other 3 signed APAs. As the CUP method requires a very high standard of comparability for application and the resale price method and profit split method require a heavy amount of information regarding the transaction and pricing, these methods tend to be applied less frequently in practice. The Chinese tax authorities hope that enterprises will better cooperate with tax officers during the APA review and evaluation phase and provide sufficient information regarding transactions and prices so that the resale price method and the profit split method may be more frequently applied in the APA program.

7. Industries covered by signed APAs

Exhibit 5-6 illustrates the industries covered by the unilateral and bilateral APAs signed by China from 2005 to 2011. 88% of the APAs signed 2005 to 2011 still involve the manufacturing industry while only 12% relate to other industries.

Ⅵ SAT Contacts (by province) for APA Requests

Appendices – Forms and Schedules of the APA Program

This article is released in the State Administration of Taxation of ThePeople’s Republic of China , see the link: http://www.chinatax.gov.cn/n8136506/n8136608/n9947993/n9948014/n12181382.files/n12181384.pdfIf you have any questions please contact with us via email: newsletters@minterpku.com, or dial the number: + 86 10 5900 9170