China: APA annual report provides statistics for 2020

The State Administration of Taxation on 29 October 2021 issued its annual report regarding China’s advance pricing arrangement (APA) program for 2020.

The statistical data in the APA annual report for 2020 covers the period from 2005 to 2020. The report reviews the progress made regarding China’s APA program in 2020, and reflects efforts by the Chinese tax authorities to promote APA negotiations and to conclude APAs despite the adverse economic impact of the coronavirus (COVID-19) pandemic.

Also in October 2021, the Organisation for Economic Cooperation and Development (OECD) issued a report reviewing implementation of the fourteenth action plan of under the base erosion and profit shifting (BEPS) program. One of the measures—"Making the dispute resolution Mechanism more effective: Review report on the implementation of the mutual agreement procedure in China (Phase 2)"—reports the latest developments in China's MAP program and relevant statistical data. Read TaxNewsFlash

According to the APA annual report for 2020, China’s tax authorities signed a total of 29 APAs in 2020, consisting of 15 unilateral APAs and 14 bilateral APAs—a new all-time high. Among these APAs, 19 were signed in the first round (which is equivalent to the statistics for 2019). Despite the adverse effects of the pandemic, the Chinese tax authorities still actively carried out online communications and negotiations, maintained negotiations, and ultimately signed these APAs.

• From the perspective of industry distribution, the APAs signed between 2005 and 2020 are dominated by the manufacturing sector, with a total of 165 (accounting for 80% of the total). Thus, the manufacturing sector is still the most prevalent market segment involved in China's APA program.
• The number of APAs concluded involving the wholesale and retail sectors reached 21, accounting for 10% and showing a growth trend in recent years.

As China's economic structure becomes increasingly diversified, it is expected that the number of APAs involving the service industry and other types of industries will also increase in the future.

• From the perspective of transaction types, between 2005 and 2020, APAs were signed in 172 cases involving tangible asset-use rights or ownership transfers, accounting for 58% of all types.
• A total of 124 cases involved intangible asset-use rights or ownership transfers and labor transactions, accounting for 42% of all types of APAs and revealing an upward trend in recent years.

In terms of the time required to achieve an APA, the overall goal of the Chinese tax authorities has been to complete the review and negotiation of unilateral APAs within 12 months, and to complete the review and negotiation of bilateral APAs within 24 months. Of the 15 unilateral APAs signed in 2020, most (13 cases) were completed within one year.

From the perspective of the transfer pricing methods used, among the APAs that were signed between 2005 and 2020, the transactional net margin method (TNMM) and the cost-plus method are still the most prevalent transfer pricing methods. Still, the Chinese tax authorities have been actively promoting other methods in recent years. In the APA annual report for 2020, the tax authorities expressed a hope that taxpayers applying for an APA can provide more sufficient transaction and price information to promote the use of other transfer pricing methods (such as the resale-price method and the profit-split method).

The MAP review report focuses on four main aspects—the prevention of disputes, feasibility of a MAP, resolution of MAP cases, and implementation of the MAP agreement.

• The statistics disclosed in the MAP review report show that as of the end of 2015, there were 89 MAP cases outstanding in China (including 61 transfer pricing MAP cases and 28 other types of MAP cases).
• Between 2016 and 2019, the number of newly initiated MAP cases by the Chinese tax authorities was as high as 125 (including 70 transfer pricing MAP cases and 55 other types of MAP cases).
• As of the end of 2019, there were 122 outstanding MAP cases in China (including 54 transfer pricing MAP cases and 68 other types of MAP cases).

In addition to traditional transfer pricing cases, in recent years, it appears that more and more taxpayers have begun to seek to eliminate non-transfer pricing related international double taxation issues (such as tax disputes related to tax treaties) through the MAP process.

In terms of the number of closed cases, there were 92 MAP cases closed between 2016 and 2019 in China, and 74% of the closed cases were newly initiated cases during this period. At the same time, there are as many as 77 transfer pricing-related cases.

From the perspective of the time of case closure, in 2019, the average time for the Chinese tax authorities to handle transfer pricing-related MAP cases initiated after 2016 was 28.8 months (compared with the average time for handling similar cases initiated before 2016). The average closing time of such cases in China in 2019 was faster than the international average for the same period (about 30.5 months). In addition, in 2019, when China handled other types of MAP cases initiated after 2016, the average time to close cases was only 16.5 months (lower than the 24-month period recommended by the OECD for MAP cases). 

Despite the adverse effects of the pandemic, the Chinese tax authorities have continued to promote APA negotiations and also formally introduced simplified procedures for unilateral APAs in July 2021. Read TaxNewsFlash

Compared with the general APA process, the simplified APA procedure is viewed as having significantly improved the efficiency of the negotiation and conclusion of APAs. At the same time, the MAP review report indicates that China has met most of the recommended minimum standards.

Thus, improved efficiency of the APA program, the promotion of simplified APA procedure, and the efforts in advancing MAP cases may provide opportunities for taxpayers to attain greater tax certainty and to avoid and eliminate international double taxation.
 

For more information, contact the Global Leader of KPMG’s Global Transfer Pricing Services:

Komal Dhall | +1 212 872 3089 | kdhall@kpmg.com