The 2019 Annual Report (APA`s 2019 Annual Report) summarizes the progress of the APP program in China, while underscoring the determination of the State Tax Administration (STA) to continuously promote the APA program and improve the quality of services provided by tax authorities to taxpayers. The number of AAPs approved and signed in 2019 has reached an all-time high, and the report also shows new trends in the types of industries, types of transactions and transfer pricing methods involved in the closed APP business. Market Notice 6 reflects the relentless concentration of tax authorities on services provided to related businesses and transactions related to intangible assets. In general, companies that have entered into large and complex agreements on these types of transactions are generally considered to face increased transfer pricing risks. By proactively requesting APAs, these companies have the opportunity to explain in detail to tax authorities the business environment, transaction structure and pricing policy of these transactions, in order to effectively manage the transfer pricing risks associated with them. For taxpayers, it may be useful to consider the categories of companies that could apply for an APA to manage their transfer pricing risks: the China Tax Administration (SAT) has published new rules on early pricing agreements (AAPs) that indicate that the Authority is ready to cooperate more closely with multinationals (MNCs), adapt to global audit standards and create a more advanced framework to fill tax gaps. The number of APAs approved and signed in 2019 reflects an all-time high, and the APP report for 2019 shows new trends in the types of sectors, types of transactions and transfer pricing methods involved in the closed APP business. For companies that import large quantities of physical goods, the tax authorities would focus on whether the import prices of the related parties are too high, which would lead to the erosion of China`s tax base. Conversely, Chinese customs authorities would ensure that import prices are too low for relatives, resulting in lower import duties. The doubts raised by both authorities make it difficult to manage the transfer pricing regimes of these companies. In recent times, China`s tax and customs authorities have been actively investigating innovation in the services sector and are working to create a framework for cooperation to address these concerns. Businesses could therefore take advantage of this cooperation by requesting an APA to manage the positions of the tax and customs authorities, in order to avoid and reduce the double national taxation. The report also shows that a unilateral APA usually takes two years, while a bilateral agreement can last more than three years.
It should be noted that this period relates to the formal application date up to the closing date – given the preparation and communication with local tax authorities prior to the presentation, this means that the actual cost of time for applicants is much higher. Transfer pricing methods used in APAs: we note in the report that five of the new signed EPAs adopted in 2019 the profit fraction method corresponding to the total number of APAs using the same method from 2005 to 2018. It shows that the Chinese tax authorities have actively tried and successfully applied the profit-sharing method during the APP negotiation process, particularly in cases where both parties to the transaction contribute significantly to value-added or to cases with site-specific benefits (“LSA”).