China Recent Transfer Pricing Regulation Update

Multinational enterprises (MNEs) generally need to prepare a transfer pricing documentation to assess whether their transfer pricing arrangements for intercompany transactions are in line with the arm’s length principles. In 2021, the economies in most countries were gradually recovered but were still impacted by the coronavirus (COVID-19) pandemic. As such, MNEs need to consider potential transfer pricing planning opportunities that may help reducing the tax risks caused by the pandemic. We hereby summarize the recent transfer pricing updates in China.

1.     Simplified procedures for unilateral APAs

With the development of the OECD’s base erosion and profit-shifting (BEPS) plan, many taxpayers incline to reach a long-term agreement with the tax authority to manage the tax uncertainty, i.e. advance pricing arrangements (APAs). On 26 July 2021, the State Taxation Administration (STA) released guidance (STA Public Notice [2021] No. 24) regarding the simplified procedures for unilateral APAs.

Under STA Public Notice [2021] No. 24, the procedures for unilateral APAs are simplified from original 6 stages to 3 stages and set a timeline of “90 days + 6 months” for the approval. This means that the tax authorities shall perform on-site interview, conduct evaluation and notify the taxpayer whether the application is accepted within 90 days from receiving the application documents. Upon accepting the application, the negotiation and signing shall be completed within next 6 months.

According to China APA Annual Report 2020 issued by the STA, China has signed a total of 116 unilateral APAs and 90 bilateral APAs from 2005 to 2020. The number of signed APAs in recent years has been increasing rapidly. We expect that more enterprises will apply for APAs to offer more tax certainty for cross-border related party transactions after the implementation of simplified procedures for unilateral APAs.

2.     FAQs on Anti-Avoidance During the Pandemic Prevention and Control released by the STA

In September 2021, following the OECD’s “Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic”, the International Taxation Department of the STA released the “FAQs on Anti-Avoidance During the Pandemic Prevention and Control”, which offers guidance on five transfer pricing questions, including transfer pricing investigation, losses arising from the impact of the pandemic, preparation of the TP documentation, the impact of government subsidies granted due to the pandemic and advance pricing arrangements.

Due to the different impacts of pandemic on different industries and enterprises, some Chinese subsidiaries may earn higher profits than routine years and some may earn lower profits or incur losses. In response to the above questions, China tax authorities emphasize that the arm’s length principle shall be adopted during the transfer pricing investigation. If there are additional costs or operating expenses incurred due to the pandemic, the impact shall be considered in comparability analysis. When preparing the transfer pricing documentation, the specific impacts of the pandemic on related party transactions, value chains, etc. shall be analyzed.

If the enterprises believe that government subsidies have an impact on transfer pricing arrangements, relevant information shall be provided in the transfer pricing documentation to support the comparability analysis.

In the event that the implementation of the signed APAs is substantially affected by the epidemic, the details shall be reported to the tax authority and it is possible to terminate or amend the signed APAs.

We suggest taxpayers considering how to respond to transfer pricing challenges arising from the pandemic.


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Dr. Gerald Neumann




Eloise Yao