Jurisdiction - China
Reports and Analysis
China – 2013 APA Annual Report Released.

26 February, 2015

 

Legal News & Analysis – Asia Pacific – China – Tax

 

On December 5, 2014, the State Administration of Taxation (“SAT”) released the 2013 China Advance Pricing Arrangement (“APA”) Annual Report (“Annual Report).1 This fifth annual report focuses on China’s APA mechanisms, procedures and practices, and provides statistics for 2005 through 2013 accompanied by an analysis of the statistics. The Annual Report came after the SAT declared publicly in September 2014 that it would suspend APA negotiations with treaty partners through 2015. Many had anticipated that the SAT would delay publishing its annual report as well because the SAT is short-handed. The release of the Annual Report, although later than the customary target date of July 1, shows that the SAT is still committed to the APA program and the suspension is only temporary.

 

The Annual Report follows the framework of the previous reports, providing a general overview of the APA system and developments from 2005 to 2013. Although it does not have yearly statistics for most of the parameters like the report published in the United States2 , a comparison with the 2012 and 2011 annual reports nevertheless enables us to use the information to paint a picture of taxpayer activities and the SAT’s endeavors with respect to APAs during 2013.

 

Although the SAT communicates its detailed strategy to the local offices every year, it is internal and not available to the public. However, the SAT has traditionally set forth its general, although not detailed, transfer pricing strategy for the years to come in the preface of the Annual Report. The Annual Report is the only place where the public can get a rough sense of what the SAT’s strategy is in the years to come. Not surprisingly, the SAT’s strategy was heavily influenced by the OECD BEPS project. In the Annual Report, the SAT calls for attention to “peculiar market characteristics in developing countries” and “fairer and more reasonable international taxation rules as the guidance for transfer pricing, advance pricing arrangement.” In addition, the Annual Report expressly statesthat “a submission that presents innovative application of transfer pricing methods or high quality quantitative analysis for intangibles, cost savings or market premiums will merit the SAT’s prioritized consideration”.

 

APA Requests Filed In 2013

 

Taxpayers filed 6 bilateral and 7 unilateral APA requests in 2013, significantly lower than the 42 bilateral and 3 unilateral requests filed in 2012. This highlights the impact that the OECD BEPS project has had on the SAT. The uncertainty created by the OECD BEPS project caused many taxpayers to consider proactive measures including APAs. However, starting from 2012, the OECD BEPS project has diverted a lot of the SAT resources away from the APA program3 . The influx of APA requests in 2012, and the reduced throttle in handling APAs ever since has deterred many potential applicants from filing APA requests. Taxpayers remain hopeful that this trend will end in 2015 when the SAT turns its attention back from the OECD BEPS project to the APA program.

 

APAs Completed

 

A record of 19 APAs (11 unilateral and 8 bilateral) were executed in 2013, a 58 percent increase from the 12 APAs (9 bilateral and 3 unilateral) completed in 2012. This is a significant increase since 2005 when the APA program was first introduced in China. Of the 8 bilateral APAs, 4 are renewals and involve comparatively less effort from SAT.

 

Open Inventory Of Cases

 

As of December 31, 2013, there is an open inventory of 121 cases that are comprised of 110 bilateral and 11 unilateral APA requests. The open inventory of cases as of the end of 2012 was 127 cases, comprised of 112 bilateral and 15 unilateral APA requests. The statistics indicate that the open inventory of bilateral APA requests are significantly more than the unilateral APA requests. The authors expect this trend to continue going forward.

 

Industries Covered

 

The Annual Report provides seven main categories of industries represented by executed APAs from 2005 to 2013: manufacturing (86); commercial services (5); wholesale trade and retail (6); transportation, warehousing, and postal services (2); scientific and technical services (2); electricity, thermo, gas and water generation and supply (1); and information transmission, software and information technology services (2). Although most of the APAs (74% in 2013) executed still involve the manufacturing industry, there is a new industry (i.e., scientific and technical services) covered in 2013. The other major industries covered by the APAs executed in 2013 are commercial services, wholesale and retail.’

 

The detailed statistics for each industry in 2013 are set out in Table One below.

 

Table One

 

Industry covered (for APAs executed in 2013) Number
Manufacturing 14
Commercial Services 2
Wholesale trade and retail 2
Transportation, warehousing, and postal services 0
Scientific and technical services 1
Electricity, thermo, gas and water generation and supply 0
Information transmission, software and information technology services 0
Total 19

 

Transfer Pricing Methods

 

Transfer pricing methods used in executed APAs have typically been dominated by the transactional net margin method (“TNMM”). In 2013, all executed APAs used the TNMM with one exception in which the comparable uncontrolled price (“CUP”) method was utilized. As of December 31, 2013, the total number of APA cases in which the CUP method has been utilized since the inception of the APA program is 5.

 

Term Length

 

The Annual Report notes that most of the APAs, be it unilateral or bilateral, were completed within two years, and 62 percent of all executed bilateral APAs from 2005 to 2013 were completed within one year. Among the 8 bilateral APAs executed in 2013, 6 were completed within one year4 . Therefore, the key in terms of overall timing is to get the APA application accepted by the SAT after the pre-filing meeting. Once an APA application has been formally accepted by the SAT, the APA could be executed within as little as one year.

 

Bilateral APAs

 

Among the 8 bilateral APAs executed in 2013, 5 were executed with Asian countries, 2 were executed with European countries, and 1 was executed with a North American country. Consistent with the previous years’ data, most of the APAs were executed with Asian countries.

 

What To Expect In 2015

 

It is expected that the SAT will turn its attention back to the APA program in September 2015. The fewer bilateral APAs executed in 2013 compared to the number of 2012 is attributable, in part, to the limited personnel and resources that the SAT has available to deal with bilateral APAs. That being said, the SAT is currently evaluating the creation of a separate division to deal with mutual agreement procedures for transfer pricing issues. Once that division is created, more resources would be devoted to the APA program and the length of time it takes to consummate an APA may be reduced.

 

End Notes:

 

1 The English version of the 2013 APA Report may be downloaded via http://www.chinatax. gov.cn/n810219/n810724/c1371141/part/1371156.pdf .

 

2 In the United States, the report is issued in March of every year. The report, titled “Announcement and Report Concerning Advance Pricing Agreements”, is issued pursuant to § 521(b) of Pub. L. 106-170, the Ticket to Work and Work Incentives Improvement Act of 1999, which requires the Secretary of the Treasury to report annually to the public on APAs and the APA Program. The first report covered calendar years 1991 through 1999. Subsequent reports covered separately each calendar year 2000 through 2013.

 

3 The APA program had only six staff members in 2013 at the SAT Headquarters.

 

4 The time starts to run only if the APA request is accepted by the SAT.

 

Baker McKenzie

 

For further information, please contact:

 

Shanwu Yuan, Director, Baker & McKenzie 

shanwu.yuan@bakermckenzie.com

 

Salim R. Rahim, Partner, Baker & McKenzie

salim.rahim@bakermckenzie.com

 

Glenn DeSouza, Baker & McKenzie

glenn.desouza@bakermckenzie.com

 

Baker & McKenzie Tax Practice Profile in China

 

Homegrown Tax Law Firms in China

 

Comments are closed.