On Advance Pricing Arrangements

Transfer Pricing of multinational enterprises and the relevant government regulation are hot issues in economic globalization. In view of that, this paper makes an extensive research on these issues, as well as the Advance Pricing Arrangements, which seems to be the trend of Transfer Pricing regulation. The paper falls into four chapters. The first chapter of this paper mainly discusses the definition and the origin of Advance Pricing Arrangements. There are three different ways of comprehension about the conception of Advance Pricing Arrangements. Based on the comprehensive analysis of the academia's different explanations on Advance Pricing Arrangements, this paper draws the following conclusions. The term of Advance Pricing Arrangements means an arrangement or a system. In the arrangement or system, multinational taxpayers negotiate with one or more countries'tax authorities and reach agreements about the transfer pricing methodology be applied to the controlled transactions between Associated Enterprises. Moreover, tax authorities should supervise the taxpayers to comply with the agreements. The agreements may be modified and the taxpayers may be audited and adjusted when it is necessary. The international tax avoidance takes place where the most typical way of tax avoidance is transfer pricing commonly used by the multinational corporations .At present, in accordance with the traditional transfer pricing mechanism, tax authorities mainly audit and adjust transfer pricing afterwards. During this course, there are complex procedures along with enormous work. It is hard to ensure the proper technology index as well as to collect evidence. Not only tax authorities but taxpayers feel it inconvenient. It is one of the most complicated problems in international taxation. In response to the situation, APAs comes into being. Advance Pricing Arrangements transfers the government regulation on transfer pricing from post-modification mode to pre-agreement mode, which avoids the limitation of post-modification and reduces effectively the transaction costs of tax collection. The APAs is promoted in order to resolve the uncertainty about transfer pricing taxation, to mitigate the administrative burden on the enterprises, and to ensure taxation predictability for the enterprises'management. The APAs is deemed to be the most effective approach for transfer pricing taxation. The second chapter of this paper mainly introduces the theoretical and practical issues of Advance Pricing Arrangements. The paper intensively analyses the principles, the purpose, the object, the scope, the legal relationship and the legal basis of Advance Pricing Arrangements, as well as the procedures of Advance Pricing Arrangements. Arm's length principle is the essential principal in APAs. Besides, facilitation, information un-closured, applying agreement separately, restriction on both sides, strict procedures, unconstraint and information equity are also principles in APAs. The purpose of APAs is for facilitation. Multinational taxpayers co-operate with one or more countries tax authorities through substantive negotiation, arrive at a satisfied solution about transfer pricing, reduce both sides cost and ensure taxation predictability for the enterprises. Taxpayers who engage in transfer pricing transactions can make an APAs request. As the principals of APAs, the status of taxpayers are equal to the tax authorities, right match to obligation. APAs is based on the domestic law and the bilateral or multilateral tax treaty. APAs is endowed with legal effectiveness, restricted by the tax treaty, comply with the confirmed methods and the arm's length principle, all information will be subject to strict non-closure standards. At the same time, this paper describes the five subsequently stages in APAs which include the pre-filing conference, submission of the formal request, investigation and evaluation, assignment of agreement and supervision of it. The third chapter of this paper states the international and domestic present situation about Advance Pricing Arrangements. The idea is put forward that in accordance with the international cooperating experience and prospect, APAs should be contained in the negotiation articles of tax treaty, triggered by the Contracting States through promissory procedures. This paper list the practice of APAs in developed countries such as the United States, Japan, Australia, the U.K. and Canada, the contribution of OECD Guidelines for Conducting Advance Pricing Arrangements under the MutualAgreement Procedure to APAs. According to these countries law and OECD Guideline, the use of bilateral APAs is preferable to prevent the risk of double taxation. APAs in our country went though the regional and national legislation stages. In September 2004, the national administration of taxation confirmed Guidance for Conducting Advance Pricing Arrangements Applying in the Affiliated Enterprise Transaction. Although it is trial rules about the operation of APAs, it is important for the transfer pricing administration in our country. The Guidance establish the system and procedure of APAs, eliminate regional difference. However, there are shortages in the Guidance comparing with the regulation of the USA and OECD. Further, due to the delay of promoting APAs, unilateral APAs is adopted widely in our country. The forth chapter of this paper mainly introduces the theoretical and practical issues of Advance Pricing Arrangements. The present tax law of APAs is still at the very initial stage, thus inevitably has various defects such as simply and abstract provision, low exercisable. As to the information non-disclosure principal and the internationalization issue which gain worldwide attention largely, the APAs regulations in our country are confronted with the same difficulties. Furthermore, there is a lot of trouble in APAs practice in our country. Taxpayers may reduce interest in APAs because of the complex evaluation, high cost, narrow applicable scope, object localization and lack of flexibility at the transfer pricing adjustment. On the other hand, rough provisions on transfer pricing, short of sufficient information in evaluation, hard work in the execution and high requirement in taxation make APAs too difficult for tax administrations to handle. Countermeasures are suggested for the drawbacks upward. Measures should be taken in the following aspects, which are respectively to complete the legislation on transfer pricing administration and the APAs Guidance, establish pricing information system, strengthen the levy and administration of taxation, promote Advance Pricing Arrangements under the mutual agreement procedure, eliminate double taxation and improve the international cooperation and coordination. Along with the rapid development of China economy, more and moremultinational enterprises attracted by the huge potential market here will be coming to China for business operation. Chinese tax administration will be faced with more complicate situation in transfer pricing taxation. Meanwhile, APAs is a significant part of the transfer pricing administration. Therefore, in accordance with national situation, APAs should be promoted by absorbing the essence of the system abroad and summing up the domestic successful experience.