Member Article

The State Administration of Taxation (“SAT”) issued the Implementing Rules for Advance Pricing Arrangements for Business Dealings Between Affiliated Enterprises (for Trial Implementation) on 3 September 2004. The Implementing Rules, which became effective on the date on which they were issued, represent another development in China’s legal framework for transfer pricing (see previous article in this China Legal Update). Advance pricing arrangement An Advance Pricing Arrangement (“APA”) is a binding agreement between taxpayers and the tax authorities on the pricing principles and computation methods of related party transactions for a certain period of time in the future. An APA is applicable to the purchase, sale and use of tangible assets, the assignment and use of intangible assets, the provision of labour services and financing between a taxpayer and an affiliated enterprise. Application and implementation process The Implementing Rules detail the entire APA application and implementation process. The process consists of six phases: • preparatory discussions: this phase commences when the taxpayer makes a written request for APA proceedings. The taxpayer and the tax authorities then hold preparatory meetings and discuss the feasibility of the APA. If they reach a consensus, the tax authorities must issue a written notification to the taxpayer authorising the taxpayer to file a formal application. • formal application: the taxpayer must submit a formal written APA application to the tax authorities within three months of receiving the written authorisation. • review and evaluation: the tax authorities have five months to evaluate the application of the taxpayer. • negotiations: the tax authorities must commence negotiations with the taxpayer within 30 days after they have concluded their review and evaluation of the application. If the negotiations are successful, the tax authorities and the taxpayer will draw up a draft APA. • execution: the representatives of both sides must enter into the APA within 30 days of reaching an agreement on the draft APA. The term of an APA is for two to four continuous years usually commencing from the year after the APA application was filed. • monitoring of implementation: during the term of the APA, the taxpayer must keep complete records and documents and file a report on the implementation of the APA to the tax authorities within four months after the end of each tax year. Coordination between tax authorities The Rules provide for the coordination between the various levels of tax authorities, including the SAT, in the process of the negotiation and implementation of an APA.