China STA’s Public Notice on the application of simplified procedure for unilateral APAs effective in September
20.9.2021
In April, we wrote about a consultation draft of the State Tax Administration (STA) of China that proposed a simplified procedure for unilateral Advance Pricing Agreements (APAs). On July, STA published the Public Notice [2021] No.24 (Public Notice) on matters regarding the application of simplified procedures of unilateral APAs, effective September 1, 2021.
According to the Public Notice, the simplified procedures apply to enterprises with annual related-party transactions exceeding RMB 40 million (approx. MEUR 5,2) for the three years prior to the tax year in which the in-charge tax authority formally accept the unilateral APA application. In addition, one of the following conditions also must be met:
The enterprise has provided contemporaneous transfer pricing documentation for the past three years to the tax authority.
The enterprise has had an APA executed within the past 10 tax years, and it has been compliant with the requirements of that APA.
Over the past 10 tax years, the enterprise has been subject to a special tax investigation and adjustment by the tax authority and has settled the adjustment.
The Public Notice further relaxes, as compared with the consultation draft, the conditions for the application of simplified procedures of the unilateral APAs. Public Notice includes removal of the requirement that enterprises submit contemporaneous transfer pricing documentation at least three months in advance in application. In addition, rules around rejecting the application if there are errors in the taxpayer’s annual related-party transaction disclosure forms and if the related-party transactions, business environment or functional and risk profile have undergone substantial changes have been removed in the Public Notice.
With the issuance of the Public Notice, even more companies can apply for unilateral APAs under the simplified procedures. Also, from taxpayer perspective, if enterprises and tax authorities have concluded unilateral APAs, the APA package can be provided to the bank for it to complete its review when processing of forex cash in-flows/out-flows based on transfer pricing methods, as required by State Administration of Foreign Exchange. Thus, besides achieving certainty, the unilateral APA also enables the enterprise to carry out year-end transfer pricing adjustments.
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