2014 17 December

China issues 2013 Advance Pricing Arrangement Annual Report

#China #Legal #Legal & Tax Update #Pricing #Tax #Transfer pricing


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:

  • By the end of 2013, the Chinese tax authorities had concluded 37 bilateral APAs. Of these, 25 are with Asian countries, seven with European countries and five with North American countries.
  • By 31 December 2013, the SAT had 82 APA requests that are yet to be officially accepted, of which 5 are unilateral and 77 are bilateral.
  • Of the total APAs concluded:
    • 65% involved transactions for tangible goods, 15% involved intangibles and 20% were for services;
    • 83% related to manufacturing businesses while only 17% covered other businesses;
    • almost 60% were negotiated and finalised within one year; and
    • 86 involved the use of the TNMM, 17 applied the cost plus method, 5 used the CUP method, 3 used the profit split method, 1 used the resale price method and 4 involved the use of other methods.

Quantera Global comments

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.


Steven Carey
Jian Li