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Unilateral APA in China - Procedures are Expected to be Simplified!


For enterprises with good tax compliance, signing Advanced Pricing Arrangement ("APA") with the Chinese tax authorities may help multinational enterprises to reduce their transfer pricing risks proactively. However, in practice, the existing APA procedure generally suffers from cumbersome negotiation and long processing and reviewing time. With the recent release of the Solicitation of Public Comments on the Announcement of the State Taxation Administration on Matters Regarding the Application of the Simplified Procedure to Unilateral Advance Pricing Arrangements (Draft for Comment) ("Draft Announcement"), we expect that more multinational enterprises will consider entering into unilateral APAs with the Chinese tax authorities in the future to enhance their business certainty in China.

Currently, enterprises apply for unilateral APAs in accordance with the relevant provisions of the Public Notice on Matters Regarding Refining the Administration of APA (SAT Public Notice [2016] No. 64, hereinafter referred to as “Public Notice 64”).  With the release of the Draft Announcement, enterprises that meet certain requirements can apply for the simplified unilateral APA procedure which not only increases the efficiency of the process, but also clarifies the deadline for processing by the tax authorities. The negotiation and implementation of the simplified procedure will be shortened from the previously in Public Notice 64 stipulated six stages to the following three stages:

  • Application & Assessment
  • Negotiation & Signing, and
  • Implementation & Monitoring


In addition, the Draft Announcement will help to improve the cumbersome process and long review time in previous APA applications by specifying the processing time of Negotiation & Signing:


​Application & Assessment​Negotiation & Signing​Implementation & Monitoring
  1. ​Analysis and assessment as well as on-site functional risk review
  2. Issuance of a Notice of Tax Matters (“Notice”) the within 90 days to the enterprise:
  • Accepted:
    Delivery of Notice;
  • Not accepted:
    Delivery of Notice and explanation of reasons.
  1. ​Negotiation between the tax authority and enterprise
  2. Completion of negotiation within 6 months starting from the delivery of an “Accepted” Notice to the enterprise
  • Consensus:
    Signing of APA;
  • Disagreement:
    Delivery of Notice and termination of the simplified APA procedure
​Submit the Annual Reporting for review/adjustment
​Deadline: (3 months)* + 90 days​Deadline: 6 months + Time for enterprises to submit supplementary information​Deadline: 3-5 years starting from the tax year when the “Accepted” Notice is delivered to the enterprise. Also, the enterprise can choose the retroactive application of previous years when submitting the application.

* Enterprises are required to submit the Contemporaneous Transfer Pricing Documentation report of the last 3 tax years in full compliance with Public Notice 42 at least 3 months before the application to the tax authorities.

As to the application conditions, enterprise, which has incurred related-party transactions of more than RMB 40 million in each of the three years preceding the tax year when the Notice was issued by the tax authority in charge, and meets one of the following three conditions, may apply for the simplified APA procedure:

  • It has, at least three months prior to the application of the simplified APA procedure, provided the tax authority with the local file for the recent three tax years in accordance to the Announcement of the SAT on Matters Regarding Refining the Filing of Related-party Transactions and Administration of Contemporaneous Transfer Pricing Documentation ([2016] No. 42). If it meets the conditions for preparing the master file, the master file shall further be provided;
  • It has implemented APAs in the recent ten tax years, and the implementation results meet the arrangement requirements; or
  • It has been subjected to special tax investigation and adjustment by the tax authority in the recent ten tax years, and the case has been closed.

It should be noted that the Draft Announcement also indicates the circumstances under which the tax authorities may reject an application, with particular reference to the compliance requirement for contemporaneous documentation and the annual related-party transactions forms. Therefore, for enterprises intending to apply for the simplified procedure, special attention should be paid to the quality of their transfer pricing compliance documentation to ensure complete and accurate disclosure of information. It is also worth noting that this issue shall also be integrated into the analysis of the Transfer Pricing Documentation. In addition, compared with the previous years, if the enterprise's related party transactions, business environment, functions and risks have changed fundamentally during the period in which the unilateral APA applies, the tax authorities may also reject the application for the simplified procedure and the enterprise may only apply for the general process of APA according to the Public Notice 64 in this case.

Our Observations

The release of the Draft Announcement shows the determination of the SAT to optimize the business environment and increase tax certainty for enterprises with good tax compliance. Furthermore, in times of economic uncertainty, the implementation of the simplified unilateral APA procedure will also bring convenience to transfer pricing year-end adjustments for enterprises. According to the "Q&As on the Administration Policy of Transfer Pricing Adjustment of Foreign Exchange Business " recently released by the State Administration of Foreign Exchange (“SAFE”), when processing "foreign exchange business of profit compensation by enterprises from transfer pricing perspective", the bank is required to review the following documents: "relevant written documents issued by tax authority or Customs, profit adjustment agreement, invoices", etc. Therefore, if an enterprise can quickly reach a unilateral APA with the competent tax authority through a simplified procedure, it can provide a copy of the APA to help the bank to quickly complete the review of the "profit compensation business from transfer pricing perspective".

In order to ensure a successful application, it is recommended that enterprises shall adequately review their own situation for quality improvement of the transfer pricing compliance documentation to ensure the completeness and accuracy of the information disclosure and comply with the application requirements. Enterprises may also consider communicating with the tax authorities in advance to assess the possibility of acceptance and related risks before making a formal application. On the other hand, given that the unilateral APA is only an agreement between the enterprise and the Chinese tax authorities, and that the unilateral APA application report requires a detailed analysis of the enterprise's value chain/supply chain as well as examination of geographically specific advantages such as cost saving and market price premium, enterprises should also 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 double taxation risk could be alleviated.

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Frances Gu


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Judy Zhu

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