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China: Application for the Simplified Unilateral APA from September 2021!


published on 5 August 2021 / reading time approx. 2 minutes
On 26 July 2021, the Chinese State Taxation Administration ("STA") has released the Finalized Announcement of the State Taxation Administration on matters regarding the application of the Simplified Procedure to Unilateral Advance Pricing Arrangements ("APA"), i.e. STA Bulletin [2021] No. 24 ("Finalized Announcement").


Compared to the Draft Announcement issued in March 2021, the Finalized Announcement and the corresponding interpretation by the STA has made further changes in the following aspects:

  • Removal of the time requirement to submit the last three years' contemporaneous Transfer Pricing ("TP") Documentation at least three months prior to the application and also clarification that enterprises that do not meet the contemporaneous TP Documentation criteria but have voluntarily supplemented the last three years' TP Documentation are also eligible to apply for the Simplified Unilateral APA;
  • Removal of the situation in which the related party transactions, operational environment, functional and risk profile of the parties in the application years have significantly changed from the previous years from the situations which are not eligible for Simplified Unilateral APA application. This has retained the feasibility for enterprises with new business model to apply for Simplified Unilateral APA application;
  • Provision of a second chance for the Simplified Unilateral APA application to  taxpayers who have not completed the annual TP filings or have made errors in their annual TP filings in the past three years will be given provided that they are able to correct their annual TP filings prior to the application.


The other articles of the Announcement remain unchanged with the original Draft Announcement.


Our Observations

The introduction of the simplified Unilateral APAs, which significantly reduces the application time,  helps to obtain tax certainty for the taxpayers' cross-border investments and also decreases the administrative burden of the Chinese tax authority in the future for these enterprises and further encourages foreign investments in China.  This will then be a "win-win" situation for both parties.


The above-listed changes of the Finalized Announcement compared to the original Draft Version further shows that STA wants to encourage more enterprises to apply for the simplified Unilateral APAs, especially those medium-sized enterprises.


In addition, the implementation of the Simplified Unilateral APA procedure along with the "Q&As on the Administration Policy of Transfer Pricing Adjustment of Foreign Exchange Business" released by Chinese State Administration of Foreign Exchange ("SAFE") at the beginning of this year, will also facilitate  year-end transfer pricing adjustments for enterprises operating in China. This could be helpful to solve the long-time headaches of multinational groups in this aspect, i.e. the difficulties of implementing group unified TP policies in China which include a year-end adjustment.


On the other hand, whether the Chinese tax authorities do have sufficient staff to  handle the Simplified Unilateral APAs could be a problem in practice. It is therefore assumed that the tax authority will be more inclined to accept those enterprises that have already applied for APAs or have been encountered TP investigations for the Simplified Unilateral APAs application, at least in the next couple of years. As such, those enterprises which have already encountered TP investigations including those who have made self-adjustments based on the risk notification issued by the tax authority, could benefit more from this regulation and are recommended to have an internal assessment regarding whether to take the advantage of this new regulation and apply for the Simplified Unilateral APAs.


Other enterprises which are interested in applying for the Simplified Unilateral APAs, one shall adequately review and amend their annual TP filings and transfer pricing compliance documentation (including both the Master File and the Local File) to ensure the completeness and accuracy of the information disclosure. On the other hand, it shall be noticed that the unilateral APA is only an agreement between the enterprise and the Chinese tax authority, and that the unilateral APA application report requires a detailed analysis of the enterprise's value/supply chain as well as an examination of location specific advantages such as cost saving and market price premium. As such, enterprises are highly recommended to communicate with their related parties accordingly prior to formal application to ensure that the general understanding agreed with the Chinese tax authorities can also be acknowledged by the competent tax authorities of the related parties, so that the risk of double taxation could be alleviated.

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