Chinese tax authorities release annual APA report
Lewis Lu of KPMG China looks at the highlights of the 2021 Advance Pricing Arrangement Annual Report.
On November 22 2022, the Chinese State Taxation Administration published the 2021 Advance Pricing Arrangement Annual Report. This provides statistics on concluded APAs in the period from 2005 to 2021. The key takeaways are as follows.
Increased focus on bilateral APAs
The Chinese tax authorities concluded a total of 20 APAs in 2021 (a decline compared with 2020, when 29 APAs were signed). More than half of these (55%) were bilateral APAs (BAPAs), with 11 BAPAs as against nine unilateral APAs (UAPAs). This is a higher proportion than for the 2005–21 period as a whole, when BAPAs made up 45% of the total (101 of 226 APAs).
Of the total concluded APAs in 2005–21, 79% (178 APAs) relate to the manufacturing industry, 11% (25 APAs) to wholesale and retail, and the remainder to other sectors. However, with the diversification of China's economy, the proportion of APAs related to the service sector is expected to grow.
Transaction types covered
Of the total concluded APAs in 2005–21, 57% (189 APAs – APAs can cover several transaction types) relate to transfers of the right to use (or ownership) of tangible assets. The remaining 43% related to transfers of the right to use (or ownership) of intangible assets and services, and there has been an increase in cases of these types in recent years.
It is anticipated that APAs will increasingly involve more diversified types of transactions; for example, 2021 featured one concluded APA related to financing transactions.
Time to conclusion shorter for UAPAs than for BAPAs
Among the nine UAPAs signed in 2021, seven cases were concluded within 24 months. With the rollout of the simplified procedures for UAPAs, it is expected that this efficiency will be further improved. Out of the 11 BAPAs signed in 2021, only two cases were concluded within 24 months.
Transfer pricing methods applied
The transactional net margin method is still the most commonly used transfer pricing method in signed APAs, accounting for 82% (225 cases).
That being said, in recent years the Chinese tax authorities have been actively seeking to use other appropriate methods, such as the cost-plus and profit-split methods.
Chinese tax authorities trends
In recent years the Chinese tax authorities have been putting more resources into dispute prevention and resolution efforts, bolstering staff in the APA and mutual agreement procedure teams.
The tax authorities have also become more stringent in their APA review requirements. They tend to prioritise APA requests accompanied by complete value chain analysis, innovative analysis methods (including new forms of transactions involving emerging industries), and sufficient quantitative analysis of intangible assets, cost savings, and market premiums.
As the market environment becomes increasingly volatile, the Chinese tax authorities will undoubtedly receive more APA requests for tax certainty. As such, companies wishing to gain access to the Chinese APA programme should work towards providing an APA documentation package which does not only provide a clear and logical analysis of the transactions but also a reasonable proposed methodology and returns.
These measures are in addition to maintaining a good working relationship with the tax authorities to ensure smoother communication during the APA process.