Quantera Global, our Transfer Pricing partner firm, published an article on the China Advance Pricing Arrangement (APA) Annual Report in the beginning of this month. The fifth annual APA report updates taxpayers on the mechanisms, procedures and track record of the APA program in China.
The State Administration of Taxation (“SAT”) issued the “China Advance Pricing Arrangement Annual Report (2013)” on 5 December 2014 (“2013 APA Report”). This is the fifth annual APA report released by the SAT to update taxpayers on the mechanisms, procedures and track record of the APA program in China.
Recently, the OECD officially revealed various “Action Plans” on Base Erosion and Profit Shifting (“BEPS”). Although it is not an OECD member, China participated in the global joint action plans and is actively involved in research into BEPS actions and especially how they impact on China. In the preface to the 2013 APA Report, the SAT reiterates its determination to strengthen co-operation with international organizations such as the UN and OECD on transfer pricing matters.
The following key trends emerge from the 2013 APA Report:
The SAT recognizes that a bilateral APA is an effective tool to achieve increased certainty on overall tax revenue allocation in the spirit of international co-operation. The ongoing and rapid development of the bilateral APA program since 2009 reflects this view.
However, what is also significant is the number of bilateral APA requests lodged that have not yet been officially accepted. There are 77 in this category, compared to 37 that have been finalised since the program began. This is indicative of the significant resource constraints still prevalent at the SAT when it comes to dealing with transfer pricing matters and in particular bilateral APAs.
For taxpayers with large and unique transactions or with a high overall risk profile, an APA may be the optimal solution to address tax and transfer pricing risk. However, it is important that taxpayers firstly perform a thorough risk assessment and cost/benefit analysis before considering embarking on the APA process. For example, such a process could reveal that the re-design of a transfer pricing policy, supported with detailed documentation and benchmarking, is sufficient for those not in the highest risk category at this stage.