STA Interpretation: Simplified Procedure for Unilateral Advance Pricing Arrangements

关于《国家税务总局关于单边预约定价安排适用简易程序有关事项的公告》的解读

Source (Chinese): STA Policy Database — 政策解读 (STA General Office, July 26, 2021)

English translation: Independent translation. Not an official government translation.

---

Q1: What is the background for issuing the Announcement?

Answer: Advance pricing arrangements (APAs) are the primary policy tool among the six special tax adjustment measures for taxpayers to obtain tax certainty. Over more than 20 years of practice in China, APAs have effectively reduced the tax compliance costs of multinational enterprises and promoted cross-border investment and operations. To implement the Opinions on Further Deepening Tax Administration Reform issued by the General Office of the CPC Central Committee and the General Office of the State Council, deepen "streamlining administration, delegating power, and improving regulation and services" reform in the tax field, optimize the business environment, promote tax authority-enterprise cooperation, and improve the level of personalized services and tax certainty for cross-border investors, the STA formulated this Announcement to further enhance the efficiency of negotiation and conclusion of unilateral APAs.

Q2: How does the Announcement interface with STA Announcement [2016] No. 64?

Answer: STA Announcement [2016] No. 64 (hereinafter "Announcement No. 64") provides general rules for APA management, while this Announcement provides special rules on the applicable procedure for enterprises meeting certain conditions that apply for unilateral APAs. This Announcement only simplifies and streamlines the applicable procedures for unilateral APAs and specifies concrete time requirements, but does not change the substantive provisions of Announcement No. 64 regarding APAs. For example, the conditions for enterprises applying for APAs, the retroactive period, the information to be included in application materials, and the content of APA texts all basically follow the provisions of Announcement No. 64. Therefore, matters not specifically addressed in this Announcement shall be handled in accordance with Announcement No. 64. At the same time, the internal review procedures within the tax authority for unilateral APAs concluded under the simplified procedure are consistent with those for the general APA procedure. The simplified procedure and the general procedure coexist simultaneously; qualifying enterprises may choose based on their own circumstances, and unilateral APAs concluded under either procedure have the same legal effect.

Q3: What simplifications has the Announcement made to the unilateral APA procedure?

Answer: The Announcement simplifies the unilateral APA procedure into three stages: application and assessment, negotiation and conclusion, and monitoring and execution. Specifically:

First, because the tax authority already has a certain understanding of the enterprise's related-party transactions, business environment, and functional risk profile before the enterprise applies for the simplified procedure, the simplified procedure eliminates the preliminary meeting stage.

Second, the Announcement merges the three stages of the general APA procedure -- intent to negotiate, analysis and assessment, and formal application -- into a single application and assessment stage. After the enterprise submits its application to the tax authority, the tax authority shall conduct analysis and assessment and functional risk interviews within 90 days of receiving the enterprise's application, and issue a Tax Matters Notice to the enterprise. If the enterprise's application is accepted, this constitutes acceptance of the enterprise's formal application; if not accepted, the enterprise shall be informed of the reasons for non-acceptance.

Third, the Announcement also sets specific time requirements for the negotiation and conclusion stage. The tax authority is required to complete negotiations with the enterprise (i.e., reach agreement on the text of the unilateral APA) within 6 months from the date of issuing the Tax Matters Notice accepting the application; if agreement cannot be reached, the simplified procedure shall be terminated.

Finally, the monitoring and execution stage is basically consistent with the general APA procedure.

Q4: What types of enterprises may apply for the simplified procedure?

Answer: According to Article 3 of the Announcement, enterprises meeting any of the following conditions may apply for the simplified procedure:

1. The enterprise has already provided to the competent tax authority contemporaneous documentation for the 3 tax years preceding the year(s) covered by the intended application, in compliance with the requirements of the STA Announcement on Matters Concerning the Improvement of Related-Party Disclosure and Contemporaneous Documentation Management (STA Announcement [2016] No. 42);

2. Within the 10 tax years preceding the tax year in which the enterprise submits its application, the enterprise has previously executed an APA and the execution results met the requirements of the arrangement;

3. Within the 10 tax years preceding the tax year in which the enterprise submits its application, the enterprise has been subject to a special tax investigation and adjustment by the tax authority, and the case has been closed.

It should be noted that if any of the following circumstances exist, the tax authority shall not accept the enterprise's application:

1. The tax authority has already initiated a special tax adjustment investigation or other tax-related case investigation of the enterprise, and the case has not yet been closed;

2. The enterprise has failed to file the Annual Related-Party Transaction Report as required and does not make timely corrections;

3. The enterprise has failed to prepare, retain, and provide contemporaneous documentation as required;

4. The enterprise has failed to provide the relevant materials as required by this Announcement, or the materials provided do not meet the requirements of the tax authority, and the enterprise does not make timely supplements or corrections;

5. The enterprise refuses to cooperate with the tax authority in conducting on-site functional and risk interviews.

In addition, unilateral APAs involving two or more provincial-level (including cities with independent planning status) tax authorities simultaneously are not yet eligible for the simplified procedure.

Q5: Can enterprises that do not meet the contemporaneous documentation preparation requirement become eligible for the simplified procedure by supplementarily preparing contemporaneous documentation for the most recent 3 tax years?

Answer: The purpose of including the contemporaneous documentation provision is primarily to encourage proactive compliance by enterprises. For enterprises with a high level of compliance, the convenience of obtaining tax certainty is enhanced. Therefore, enterprises that do not meet the contemporaneous documentation preparation requirement may become eligible to apply for the simplified procedure by supplementarily preparing and providing the contemporaneous documentation for the most recent 3 tax years to the tax authority before applying for the simplified procedure.

Q6: Can enterprises applying for renewal of a unilateral APA apply for the simplified procedure?

Answer: According to Article 3 of the Announcement, enterprises that "within the 10 tax years preceding the tax year in which the enterprise submits its application, have previously executed an APA and the execution results met the requirements of the arrangement" may apply for the simplified procedure when submitting a renewal application, provided that the execution results of the original APA met the requirements of the arrangement.

Q7: Can enterprises use the unilateral APA approach to enter into a cost sharing agreement through the simplified procedure?

Answer: As long as the enterprise meets the conditions for applying for the simplified procedure, it may apply to enter into a cost sharing agreement through the simplified procedure. However, it should be noted that the enterprise's contemporaneous documentation should also include the special documentation for cost sharing agreements.

Q8: If the tax authority and the enterprise cannot reach agreement through negotiation and the simplified procedure is terminated, can the enterprise re-apply for the simplified procedure?

Answer: If the tax authority and the enterprise cannot reach agreement and the simplified procedure is terminated, the enterprise may not re-apply for the simplified procedure. However, the enterprise may re-apply for an APA under the general procedure pursuant to Announcement No. 64. To reduce the burden on the enterprise, materials already submitted during the simplified procedure need not be re-submitted.

Q9: Can an enterprise whose unilateral APA execution is terminated due to material changes during the execution period re-apply for the simplified procedure?

Answer: Where material changes affecting the unilateral APA occur during its execution period, resulting in termination of execution, the enterprise may re-apply for the simplified procedure for a unilateral APA in accordance with the provisions of this Announcement.

Q10: How are the applicable years for a unilateral APA under the simplified procedure determined?

Answer: The Announcement explicitly provides that the applicable years for a unilateral APA under the simplified procedure are 3 to 5 years commencing from the tax year in which the competent tax authority issues the Tax Matters Notice accepting the enterprise's application. Since the simplified procedure merges the three stages of the general APA procedure -- intent to negotiate, analysis and assessment, and formal application -- into a single application and assessment stage, the determination of applicable years for a unilateral APA under the simplified procedure is substantively consistent with the relevant provisions of Announcement No. 64.