Research On Advance Pricing Agreement And Its Application In China

Transfer Pricing of multinational enterprises and the relevant government regulations are hot issues in economic globalization with Advance Pricing Arrangements a new way of adjusting and controlling Transfer Pricing. This paper makes an extensive research on Advance Pricing Arrangements under the circumstance of China's legislation and practice. The paper falls into three chapters.The first chapter of this paper mainly discusses the definition, the origin, basic principles and elementary procedure of Advance Pricing Arrangements. The term of Advance Pricing Arrangements means an arrangement or a system, in which multinational taxpayers negotiate with one or more countries'tax authorities and reach agreements about the transfer pricing standards and controlling methods applied to the transactions between Associated Enterprises, Moreover, tax authorities should supervise the taxpayers may be audited and adjusted to comply with the agreements that may be modified when it is necessary. Transfer pricing is used widely by multinational corporations to avoid tax and is audited and adjusted by authorities afterwards. In accordance with the traditional transfer pricing mechanism, it is difficult to choose the proper index as well as to collect evidence, besides there are redundant procedures along with enormous working tasks. It is inconvenient for both tax authorities and taxpayers. In this situation, APAs comes into being and transfers the governmental 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. 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 of multinational taxpayers'co-operating with one or more countries tax authorities through substantive negotiation, arriving at a satisfied solution about transfer pricing, reducing both sides cost and ensuring taxation predictability for the enterprises. There are generally six subsequently stages in APAs which include the pre-filing conference, submission of the formal request, investigation and evaluation, negotiation, assignment of agreement and supervision.The second chapter of this paper mainly introduces our legislative status of Advance Pricing Arrangements, which goes from regional to national ones. So far, the state laws consist of 3 regulations.《APAs execution between affiliated companys》is an important progress in our regulating transfer pricing with APA, though it is only a proposed law. It erects system and procedure of APA and decreases regional discrepancy. It is made of 8 parts: general provisions, the pre-filing conference, submission of the formal request, investigation and evaluation, negotiation, assignment of agreement and supervision and appendix. With its appearance, our APA develops fast. We assign the first bilateral APA with Japan in 2005 and a second with USA in 2006. APA is employed in practice, while the legislation lags behind, which testifies the blank of our taxation law. We should establish bilateral regulation of APA as soon as possible to be executed by both tax authorities and taxpayers. Ours are too rough to compare with concrete rules of USA and OECD. APA is advocated not as early as other countries and most times is practiced unilaterally.The third chapter of this paper mainly introduces the theoretical and practical issues of Advance Pricing Arrangements and brings forth the advice for its perfection. 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. Our country is confronted with the same difficulties as to the information non-disclosure principal and the internationalization issues which gain worldwide attention. Furthermore, there is a lot of trouble in APAs practice. On the one hand taxpayers'interest may be reduced 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. Measures should be taken to remedy these shortcomings in the following aspects, above all, legislation on transfer pricing should be completed. Further, the pricing information system should be established, with administration of taxation strengthened and promoted in the APAs Guidance, what's more, we should implement Advance Pricing Arrangements under the mutual agreement procedure, eliminate double taxation and improve the international cooperation and coordination.The other insufficiencies are: firstly, the provisions for un-closure describe imprecisely, in which the items are too coarse. It should be laid more accurately. It says no words on the punishment and damages when tax authorities disclosed the secret. Secondly, no incentive system is regulated to stimulate APAs'development. Thirdly, the key hypothesizes are too broad. Fourthly, no rules are for the withdraw condition of APA. The author provides the following advice based on the study on the rules of USA and OECD: We should accelerate the legislation on bilateral and multilateral agreement of APAs, lay emphasis on the flexibility of procedure like USA, and pay attention to the details according to《Guidelines for Conducting Advance Pricing Agreements Under The Mutual Agreement Procedure》of OECD.Along with the rapid development of China economy, more and more multinational enterprises are attracted by the huge potential market and invest widely and intensively. 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.