On 30 July 2021, the State Taxation Administration (STA) announced on the Matters Regarding Application of the Simplified Procedures for Unilateral Advance Pricing Arrangements (State Taxation Administration Announcement  No. 24, hereafter “No.24”). Relying on the advance pricing arrangement (APA) framework set out in the Announcement of the State Taxation Administration on Issues to Improve Administration of Advance Pricing Arrangements (State Taxation Administration Announcement  No. 64, hereafter “No.64”), the STA has further simplified the procedures for unilateral APAs, valid from 01 September 2021.
Highlights of No. 24-Simplify the Procedures and Set a Time Limit
No. 64 regulates that the APA process consists of the following six phases: (i) pre-filing meeting, (ii) intention for an APA, iii) analyses and evaluation, (iv) formal filing, (v) negotiations and signing, and (vi) monitor and execution (collectively referred as "general procedures"). The simplified procedures contain three phases, namely (i) evaluation of application, (ii) negotiation and signing, and (iii) monitor and execution. The pre-filing meeting and other phases are exempted.
The simplified procedures set clear processing time limits for tax authorities on the acceptance of APA applications, and the negotiation and signing. Tax authorities must send a Notice on Tax Matters to the submitting enterprise within 90 days of receiving the APA application to inform the enterprise of whether or not the application has been accepted. The in-charge tax authorities must complete the negotiation within six months of issuing the Notice of Tax Matters to the enterprise accepting the application. During the negotiation, any time spent by the enterprise on preparation and submission of additional information required by the tax authorities is not included in the six month period. As such, if the related documents are fully-prepared in advance and submitted by the enterprise in time, a unilateral APA application could be concluded within six to nine months under the simplified procedures. Unilateral advance pricing arrangements shall apply to related party transactions in the period of three to five years from the tax year following the date of service of the "Notice on Tax Matter" on the enterprise by the tax authorities in charge for acceptance of application.
The left column of the following table shows the two applicable conditions, both of which must be met for using the simplified procedures. The right column of the table also shows the circumstances under which the tax authorities may reject an application and when the simplified procedures are temporarily not applicable.
Table: Application Conditions and Rejection Circumstances of the Simplified Procedures for Unilateral APAs
Observations and Recommendations
APAs are arrangements reached between enterprises and tax authorities, or between two tax authorities, with respect to the pricing principles and calculation methods for related-party transactions. It is an important tool for enterprises to obtain transfer pricing and tax certainty for cross-border business operations, and it plays an important role in reducing multinational enterprises' transfer pricing compliance costs and in promoting enterprises' cross-border investments and operations. No. 24 announces simplified procedures for unilateral APAs, improving the efficiency of APA negotiation and signing by simplifying the phases of the application and specifying time limits.
Based on our practical experience, we consider that enterprises should focus on the following aspects:
- Time limits – This is the first time that APA regulations have specified timeline requirements for tax authorities, where decisions on whether or not to accept the APA application must be made within 90 days and negotiation and signing must be completed within six months. This will help enterprises and tax authorities complete the entire unilateral APA negotiation and signing process within a shorter period. We believe that such time limits requirement may reduce enterprises' concerns on the relatively time-consuming process of APA negotiation and signing.
- Applicable conditions — When evaluating whether an enterprise meets the applicable conditions for the simplified procedures, the enterprise may proactively plan to meet the requirements. For example, an enterprise that is exempt from preparing the contemptuous transfer pricing documentation may consider obtaining the application by preparing and submitting the contemporaneous transfer pricing documentation for the latest three tax years to tax authorities.
- Applicable to unilateral APAs — While there are advantages, the simplified procedures do not change the effect of unilateral APAs. If both parties in the cross-border related-party transaction want to obtain tax certainty and reduce double taxation risks more effectively, we recommend applying for bilateral APAs in accordance with the general procedures under No. 64.
Before, STA shall involve in each case of Unilateral Advance Pricing Arrangement, which objectively makes the number of arrangements signed can not meet the actual needs of enterprises. With the formally establishment of the Simple Procedures for Unilateral Advance Pricing Arrangement, STA delegates the executive power to competent tax authorities of enterprises, which can improve the ability to process applications. Thus, it can help enterprises effectively avoid or eliminate double taxation and achieve CIT certainty in transfer pricing arrangements.
We recommend that taxpayers with cross-border related-party transactions should actively understand the simplified procedures for unilateral APAs, one of the most critical measures of improving the business environment in the field of taxation, and should communicate and discuss internally. Enterprises may leverage this new policy to gain tax certainty in a more time-efficient and cost-effective way.
 The time to completion is expected to be significantly shorter under the new regulations. According to the 2019 China Advance Pricing Arrangement Annual Report published in October 2020, the STA signed 101 unilateral APAs between 1 January 2015 and 31 December 2019, most of which were completed within 2 years, with 52.48% completed within 1 year, 36.63% within 1 to 2 years, and 10.89% over 2 years.