China's State Administration of Taxation (SAT) has issued Announcement No. 24 (2021), providing simplified procedures for unilateral advance pricing agreements (APAs), which will come into effect on 1 September 2021. An Interpretation of the Announcement from the SAT has also been issued.
The simplified procedures are meant to optimize the business environment, promote tax cooperation, and improve the certainty of corporate taxation. The Announcement is largely in line with the draft that was consulted on earlier in the year and provides that enterprises that apply for an APA in accordance with Announcement 64/2016 may enjoy simplified procedures if meeting the conditions of the Announcement. To qualify for the simplified procedures, an enterprise must have annual controlled transactions exceeding CNY 40 million in the three years prior to the year an APA application is made and must meet one of the following conditions:
Where the conditions are met, an enterprise may submit a prescribed application form for the APA simplified procedures (attached to announcement). The application includes typical information requirements for an APA, including information on the related parties and transactions, the applicable year and whether the APA is to apply retrospectively to previous years, the organization and management structure of the enterprise, operations and financial data, descriptions of functions and risks, transfer pricing methods and calculations, etc.
In certain circumstances, applications for the simplified procedure will be rejected, including where:
Note, the last condition for rejection above has been added in the final version of the announcement, while a prior condition in the draft has been removed. The removed condition for rejection concerns substantial changes in controlled transactions, the business environment, and functional risks of the enterprise during the APA application period as compared with previous periods.
Once an application is received, the tax authority will have 90 days to inform the enterprise of whether or not the application is accepted. If accepted, APA negotiations will proceed and are to be completed within 6 months. However, additional materials may be requested by the tax authority, with the time taken by the enterprise to submit the additional materials not included in the 6-month period. If agreement is reached during negotiations under the simplified procedures, the APA will be drafted and signed. The allowed term of the APA under the draft Announcement is three to five years from the year in which the tax authority issues the Notice of Tax Matters to the applicant, accepting the application.
If agreement is not reached, a notice of termination of procedures will be issued, with the enterprise then allowed to reapply for an APA under the standard procedures under Announcement 64/2016, without the need to resubmit information already submitted. It is also provided that if substantial changes affecting the APA occur during the implementation that leads to the termination of the APA, the enterprise may reapply in accordance with the provisions of Announcement No. 24 (in the draft, reapplication was required in accordance with the provisions of Announcement 64/2016). Lastly, it is provided that unilateral APAs involving the tax authorities of two or more provinces, autonomous regions, and certain municipalities and cities are not eligible for the simplified procedures.