‘SAT Announcement on the Enhancement of Administration of Advance Pricing Arrangement(‘APA’)’ (‘Announcement’)will come into effect beginning on 1 Dec. 2016

Recently, SAT has specified the system and procedures of APA which has been stipulated in the ‘Notice of the State Administration of Taxation on Issuing the Measures for the Implementation of Special Tax Adjustments (for Trial Implementation)’ (GUO SHUI Fa[2009] No.2), the highlights are as follows:

Adjust the stages of APA meeting

The APA meeting consisted of 6 stages, pre-filing meeting, intention, analysis and appraisal, formal application, negotiation and signing, supervision of implementation. Compared with ‘GUO SHUI Fa[2009] No.2’, the ‘formal application’ has been moved from the second stage to the forth stage. This adjustment means more preparation work will be completed prior to the ‘formal application’ stage, which could reduce the risk of being rejected.

Extend the application period of APA

‘GUO SHUI Fa[2009] No.2’ stipulates that APA is applicable to related party transactions from the submission of the formal application. But the Announcement stipulates that APA is applicable to related party transactions from the taxable year when the competent tax authority issues the Notice of Tax Matters to the enterprise signaling the acceptance of the enterprise’s application intention.

Add more factors for appraisal

In addition to the factors which shall be evaluated as stipulated in ‘GUO SHUI Fa[2009] No.2’, the Announcement adds other 2 factors: value chain analysis and contribution analysis. It requires the tax authority to evaluate whether the enterprise’s analysis fully considers location specific advantages such as cost savings and market premium, whether the local enterprise makes contribution to value creation.

Apply the BEPS action plan

The Announcement adds the information exchange for unilateral APA. According to the basic requirement of BEPS, China promises to exchange information of unilateral APA that are signed after 1 April 2016 with tax authorities in other countries (regions) in accordance with the international conventions and agreements signed with overseas parties, and the Chinese tax authorities would disclose the unilateral APA signed among group members in the group master file.