Jan. 2 – China’s State Administration of Taxation (SAT) released the “China Advance Pricing Arrangement Annual Report (2011)” in both Chinese and English on December 26, 2012. The report introduces China’s advance pricing arrangement (APA) system, implementation procedures, and practice development, as well as covers the statistical data and analysis of APAs negotiated or concluded during 2005 to 2011.
An APA refers to an arrangement whereby an enterprise applies in advance to negotiate and reach agreement with the tax authorities with respect to the transfer pricing methods and corresponding calculation methods to be applied to the enterprise’s related party transactions for future years in accordance with the “arm’s length principle.” The APA may be categorized as unilateral, bilateral or multilateral based on the number of competent tax authorities of the countries (or regions with independent tax jurisdiction) involved in the APA.
APAs are an effective way to deal with transfer pricing issues and potential transfer pricing disputes through cooperation between tax authorities and enterprises, and has the following advantages:
- Provide clear responsibilities and obligations for tax authorities and enterprises in regards to transfer pricing issues for future years, thereby offering certainties to taxpayers’ operations and relevant tax obligations
- Reduce tax authorities’ costs related to transfer pricing administration and audit, effectively mitigating the risk of transfer pricing audits, and lowers tax compliance costs for enterprises
- Improve the tax compliance services provided by tax authorities, facilitates the balanced development of administration and services, and assures taxpayers of their relevant rights and benefits
Besides, bilateral and multilateral APAs are able to offer the following additional advantages:
- Facilitate communication and collaboration among the competent tax authorities of different jurisdictions
- Enable enterprises to avoid transfer pricing adjustments as well as double taxation risks in two or more tax jurisdictions
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