Advance Pricing Arrangements (“APA”) is a formal agreement between taxpayers and tax authorities on the related-party transactions’ pricing policy, which could help tax authorities and enterprises to resolve transfer pricing (“TP”) issues.

The Chinese State Administration of Taxation ("SAT") has recently released the Finalized Announcement on matters regarding the application of the Simplified Procedures of Unilateral APA, i.e., SAT [2021] No. 24 ("the Announcement"), which specifies changes in the following aspects:

-       Removal of the time requirement to submit the last three years' TP contemporaneous documentation at least three months prior to the application and also clarifies that enterprises that do not trigger the TP contemporaneous documentation criteria but have voluntarily supplemented the last three years' TP documentation are also eligible to apply for the Simplified Unilateral APA;

-       Permission of the situation in which the related party transactions, operational environment, functional and risk profile in the application years have significantly changed from the previous years. This allows enterprises with new business models to apply for Simplified Unilateral APA;

-       Providing Simplified Unilateral APA applications to taxpayers who have not duly completed the annual related party transaction (“RPT”) filings in the past three years if they can duly submit their annual RPT filings prior to the application.

The Announcement stipulates that applicable enterprises shall meet Condition One as well as any one of the stipulations outlined in Condition Two.

-Condition One:

The amount of related party transactions occurred in each of the first three years prior to the tax year in which the Notice of Tax Matter is served by the tax authority, is above RMB 40 million.

- Condition Two:

1. The enterprise has provided to the tax authority TP contemporaneous documentations of three tax years prior to the year of application; or

2. Within 10 years prior to the tax year of application, the enterprise has implemented an APA and the implementation result complies with the requirements of such APA; or

3. Within 10 years prior to the tax year of application, the enterprise has been subject to TP audit and adjustment by the tax authority, and the case has been concluded.

Our Observations

Enterprises interested in applying for the Simplified Unilateral APAs shall review their eligibility, annual RPT filings and TP documentation (including the Master File and the Local File) to ensure the completeness and accuracy of the information. If you would like to know more about the most recent tax and financial policy developments in China, please contact us at: info@phcadvisory.com.