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How to Secure Tax Certainty through Advance Pricing Arrangements in China (Part One)

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How to Secure Tax Certainty through Advance Pricing Arrangements in China (Part One)

In the complex global business environment, cross-border related-party transactions have become a common form of capital flow and business layout for enterprises. The subsequent uncertainty in transfer pricing has continuously brought unforeseeable tax risks to enterprises. Against this backdrop, advance pricing arrangements (“APA”), as a forward-looking tax management tool, are being adopted by an increasing number of multinational enterprises to address transfer pricing disputes and enhance tax certainty. Based on our practical experience in this field, Kaizen has sorted out the relevant key points for your reference to help you steadily advance the related arrangements.

Advantages of APA

The APA is an agreement reached by both the tax authority and the enterprise on a voluntary, equal and mutually trusting basis. Its main advantages include:

(1)	Enhance operational and tax certainty Provide a clear framework for enterprises' related-party transaction pricing in future years, thereby reducing uncertainties regarding tax outcomes.
(2)	Mitigate tax risks and lower compliance costs Effectively reduce the risk of enterprises being subjected to transfer pricing audits by tax authorities and decrease associated tax compliance costs.
(3)	Prevent or eliminate international double taxation Help enterprises avoid the risk of facing transfer pricing adjustments in multiple countries (regions) and effectively prevent or eliminate instances of international double taxation.

APA Operation Process

(1) Pre-filing Meeting;
(2) Letter of Intent;
(3) Analysis and Evaluation;
(4) Formal Application;
(5) Negotiation and Signing;
(6) Implementation and Monitoring;

Although the process appears to be clearly divided into stages in form, in practice it remains highly complex and intricate, involving meticulous preparation across multiple phases, repeated communication with tax authorities, and navigating multiple layers of review. Consequently, substantial time and professional resources are often required throughout its actual implementation.

Matters to Note for the Pre-filing Meeting

The Pre-filing Meeting serves as a critical prerequisite for formally initiating the APA process. Enterprises must complete the necessary Analysis and Evaluation in advance and prepare relevant materials for the potential Formal Application. To assist you in making a preliminary evaluation, key preparatory requirements are outlined as follows:

(1)	For a unilateral APA, the enterprise shall submit a written application for pre-filing meeting in the form of the APA Pre-filing Meeting Application Letter to the in-charge tax administration(s). The in-charge tax administration(s) may schedule one or several pre-filing meetings with the enterprise.
(2)	For a bilateral/multilateral APA, the enterprise shall submit a written application for pre-filing meeting in the form of the APA Pre-filing Meeting Application Letter to both the State Taxation Administration (STA) and the in-charge tax administration(s). The STA may schedule one or several pre-filing meetings with the enterprise.

During the preparatory talks on unilateral advance pricing arrangements, tax authorities usually conduct a systematic assessment of the following core contents submitted by enterprises:

(1)	Applicable period: Tax years to be covered by the APA;
(2)	Transaction Scope and Subjects: Related parties and related party transactions to be covered by the APA;
(3)	Enterprise and Group Structure: Organizational and management structure of the enterprise and the group it belongs to;
(4)	Historical Operation and Data: Business operations, financial and accounting reports, audit reports, and contemporaneous transfer pricing documentation of the enterprise for the most recent 3 to 5 years, etc.;
(5)	Explanation of the functions and risks of each related party involved in the reservation pricing arrangement: including the allocation keys used to allocate the functions, risks, such as facilities, personnel, expenses, assets involved, etc.;
(6)	Market Conditions and analysis: including industry developments and trends, and competitive environment, etc.;
(7)	Other special factors: Whether there are regional special advantages such as cost savings and market premiums;
(8)	Retroactive application: Whether the reservation pricing arrangement is retroactive to the years prior to the trial.

Kaizen’s Kind Reminder

To ensure the tax compliance and legality of your cross-border business, you may be considering applying for APA. It should be noted that such appointment scheduling procedures are complex and involve extensive argumentation, communication and strict document review during the application process. Any negligence in any link may lead to the suspension of the process or overall failure. It is recommended that you fully understand the situation before taking action to ensure a smooth process and the successful achievement of the goals.

KAIZEN Group is equipped with experienced and highly qualified professional consultants and is therefore well positioned to provide professional advice and services in respect of the formation and registration of company, application for various business licenses and permits, any compliance, tax planning, audit, and accounting in China. Please call and talk to our professional consultants for details.

Disclaimer

All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage.

If you wish to obtain more information or assistance, please visit the official website of Kaizen CPA Limited at www.kaizencpa.com or contact us through the following and talk to our professionals:
Email: info@kaizencpa.com
Tel: +852 2341 1444
Mobile : +852 5616 4140, +86 152 1943 4614
WhatsApp/ Line/ WeChat: +852 5616 4140
Skype: kaizencpa

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How to Secure Tax Certainty through Advance Pricing Arrangements in China (Part One)

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