Foreword

The release of the “China Advance Pricing Arrangement Annual Report (2010)” has been well-received by the business community and the international tax community. The China State Administration of Taxation (“SAT”) hereby issues the 2011 Annual Report, prepared subsequent to the release of the relevant statistics.

As a major aspect of China’s anti-avoidance work, Advance Pricing Arrangement (APA) is an important tool for China to deal with cross-border tax issues and safeguard cross-border taxpayers’ legitimate rights. Cross-border tax administration in a globalized world economy requires a fair allocation of MNCs’ worldwide profits between the exporting countries and importing countries of capital and technology. Compared with developed countries, developing countries are usually capital and technology importing countries, and manufacturing countries and emerging markets as well. Traditional profit allocation rules often neglect to consider the significant contribution to MNCs’ worldwide profits arising from Location Specific Advantages (“LSAs”) and other factors which exist in the capital and technology importing countries. China, as a major capital and technology importing country, has been constantly exploring and developing profit allocation concepts which recognize and rightly reflect the contribution of capital and technology importing countries, and applying them in China’s transfer pricing and advance pricing arrangement practice. Concepts including LSAs, cost savings, market premium, marketing intangibles have been increasingly acknowledged and accepted by the international tax community and business community.

APA is also an important effort by the SAT to improve services and provide certainty for taxpayers under the scientific development concept. Regularly releasing APA annual reports is a major initiative of SAT to enhance transparency of the APA program. This Report introduces China’s APA mechanisms, procedures and practices, and provides statistics for 2005 through 2011 accompanied by an analysis of the statistics. An important addition worth noting in the 2011 report is a list of SAT contacts by province for APA requests, and a brief description of the APA program operation in 2011, which further demonstrates SAT’s determination to enhance transparency and taxpayer service.

The SAT hopes this Report will provide useful guidance to taxpayers, particularly MNCs investing in China and Chinese companies “going global”, and keep the general public, foreign tax administrations, and international organisations well informed of China’s APA Program practice.

Wang Li

Deputy Commissioner

State Administration of Taxation

December 2012

Content

Foreword. 1

Notes. 4

Ⅰ Introduction to China’s APA Program.. 5

1. Definition. 5

2. Categorization. 5

3. Advantages. 5

Ⅱ Legislation and Practice Development of China’s APA. 6

1. History. 6

2. Existing Legal Basis. 8

Ⅲ APA Procedures. 8

1. Prerequisites to an APA Application. 8

2. APA Process and Implementation. 9

A. Pre-filing Meeting. 10

B. Formal Application. 11

C. Examination and Evaluation. 13

D. Negotiation. 13

E. Signing. 14

F. Implementation and Monitoring. 14

3. Rollback. 15

4. Renewal 15

5. Termination or Cancellation. 16

Ⅳ Protection of Taxpayers’ Rights. 16

1. Confidentiality of Taxpayers’ Information. 16

2. Taxpayers’ Freedom of Contract. 16

Ⅴ Statistics. 17

1. APAs Signed by Year. 17

3. APAs by Transaction Type. 20

4. Bilateral APAs by Region. 21

5. APAs by Time Taken. 21

7. Industries covered by signed APAs. 24

Ⅵ SAT Contacts (by province) for APA Requests. 24

Appendices – Forms and Schedules of the APA Program.. 24

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