|
First bilateral advance pricing agreement between China and Korea
The Korean National Tax Service ("KNTS") announced on 7 November 2007 that it had reached a bilateral advance pricing agreement ("APA") with the State Administration of Taxation ("SAT") of China. The APA, involving a Korean multinational company and a few of its subsidiaries in China, was signed by Mr Han Sang Yool, deputy commissioner of the KNTS, and Mr Qian Guanlin, deputy commissioner of the SAT on 6 November in Seoul during the 12th commissioner conference between China and Korea.
PricewaterhouseCoopers assisted in the APA case, which is the first bilateral APA between China and Korea, and the third bilateral APA for China.
According to the KNTS' announcement, the KNTS and the SAT held the first negotiation meeting on the APA in May 2006, which was followed by working-level negotiations including letter correspondences and face-to-face meetings. The final agreement was reached in August 2007. The APA would allow the relevant companies in China to be exempted from transfer pricing audits for the next five years.
APAs in China
In China, an APA is an arrangement that determines in advance, an appropriate set of criteria to ascertain the transfer prices of specified related parties transactions over a fixed period of time. An APA may take the form of unilateral, bilateral or multilateral. A unilateral APA involves only agreement between the taxpayer and the Chinese tax authority. A bilateral or multilateral APA involves an APA between the taxpayer and the Chinese tax authorities that is concurred by a mutual agreement between China and one or more relevant foreign competent authorities.
The concept of an APA was first introduced into the Chinese transfer pricing regulations in 1998. In 2004, the SAT issued detailed rules on the application, evaluation, examination, negotiation and conclusion of APAs. Under the Chinese APA rules, a taxpayer must first apply for and obtain approval from the tax authorities before it can submit an APA application. The term of an APA may range from two to four years starting from the year in which the application is submitted, and may be extended backward to cover the application year. Rollback to years prior to the application year, however, is not permitted under the current APA rules.
So far, there have been more than 180 APAs concluded in China, most of which are unilateral. In addition to this new bilateral APA with Korea, China has concluded two other bilateral APAs with Japan and the US respectively. Many APA applications are currently being processed, including a number of bilateral APA ones.
The implementation of the new Corporate Income Tax ("CIT") in 2008 Law is expected to result in wider use of the APA by taxpayers. The CIT Law contains a provision on APAs which enhances the legal status of APA. Therefore, the taxpayer may find it more attractive to use an APA due to the increased certainty resulting from this. On the other hand, under the CIT Law and its proposed detailed implementation rules, where a taxpayer intends to implement a cost sharing arrangement ("CSA") in China, the SAT may require the taxpayer to apply for an APA to cover the CSA, or to go through an APA type of application procedure in order for the CSA to be recognized by the Chinese tax authorities.
PwC observation
Transfer pricing has been a significant concern for multinational companies in China. In recent years, the Chinese tax authorities have increasingly strengthened their transfer pricing enforcement efforts, as evidenced by more frequent transfer pricing audits and enquiries, and larger amounts of transfer pricing adjustments.
Starting next year when the new CIT Law becomes effective, the taxpayers will face special interest levy, comprising the finance cost element and penalty element, on transfer pricing adjustments, if any. In addition, the SAT is expected to issue more detailed requirements on transfer pricing documentation, which will impose significantly more compliance burden on multinational companies.
A number of alternatives are potentially available for multinational companies to manage their transfer pricing risks and to deal with transfer pricing disputes with the Chinese tax authorities. These include the preparation and maintenance of transfer pricing documentation and defence files, defence or negotiation with the in-charge tax bureaus to settle transfer pricing audits, domestic appeals, competent authority assistance, and unilateral or bilateral / multilateral APAs.
An APA provides the taxpayer with an opportunity to achieve certainty on its transfer pricing before controversies arise with one (in a unilateral APA) or more (in a bilateral or multilateral APA) tax authorities. An APA is also an alternative to the traditional dispute resolution process involving transfer pricing audits and tax audit defence.
Preparation is essential for an APA application. Taxpayers must first evaluate their own situations and weigh the pros and cons before applying for the APA. To substantiate the APA case, taxpayers must adequately build up their business case, background, and commercial and economic analysis of the APA. During the course of negotiating the APA, taxpayers must ensure good communication with all levels of state and local tax authorities, taking a collaborative approach to quickly and accurately respond to and clarify any queries raised.
Managed properly, the APA is an invaluable tool for taxpayers to manage their transfer pricing issues in China. As the Chinese tax authorities become more experienced with APAs, it is expected for the APAs to grow in number as well as importance, in particular under the new CIT Law regime.
|
