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PROCEDURAL RULES FOR ADVANCE PRICING AGREEMENTS
Article 23 of the Regulations Governing As-sessment of Profit-Seeking Enterprise Income Tax on Non-Arm's-Length Transfer Pricing provides that when a profit-seeking enterprise intends to conduct a transaction that meets the conditions set out in Article 23 Paragraph 1 with a related party, it may file an application in the prescribed form, within the time limits set out in Article 23 Paragraph 2, with the competent tax collection authority for an advance pricing agreement (APA). In order to ensure that the five regional National Tax Administration (NTA) offices apply the same procedures when han-dling APA applications, on 21 September 2007 the Ministry of Finance (MOF) announced the Directions for Advance Pricing Agreements with Profit-Seeking Enterprises. The contents of the Directions are outlined below:
．A tax collection authority may set up an APA review committee to process APA applica-tions, consisting of 7 to 15 members.
．The director of the First Examination Division should serve as executive secretary to the committee, and be responsible for the overall management and coordination of its work. The executive secretary may appoint persons with the requisite specialist abilities to form an assessment team to handle APA applications, and may designate one of them as team leader.
．When a profit-seeking enterprise intends to conduct a transaction that meets the conditions set out in Article 23 Paragraph 1 of the As-sessment Regulations with a related party, it may file an application in the prescribed form and, within the time limits defined by Article 23 Paragraph 2, with the competent tax col-lection authority.
．The procedure by which a tax collection au-thority should process an APA application is as follows:
1.Within one month after receiving an ap-plication, the assessment team should in-form the applicant whether it will accept the application for processing. If it accepts the application, it should conduct a review and assessment after the applicant pro-vides the documents and reports pre-scribed under Article 24 of the Assessment Regulations.
2.Within one year after receiving the pre-scribed documents and reports from the applicant, the tax collection authority should complete its review and assessment, and render a decision. If due to special circumstances the tax collection authority needs to extend the assessment period, it should inform the applicant within the above time period, and may extend the assessment period by up to six months. If necessary, a further extension of up to six months may be made. But this limit on extensions does not apply in the case of a bilateral or multilateral APA involving a double taxation agreement.
3.After completing its review and assess-ment, the assessment team should write an assessment report, which it should present to the APA review committee for consid-eration. If a party to the transaction en-visaged by the applicant comes under the jurisdiction of another tax collection au-thority, the team should first consult the other tax collection authority and request that it provide its opinion within one month. The assessment team should re-view this opinion together with its own findings and should notify the other tax collection authority of its conclusions. If the other tax collection authority objects to the conclusions, it should put forward suggestions within two weeks, and the tax collection authority processing the appli-cation should convene a meeting to dis-cuss and resolve the issues.
．If, prior to an APA being concluded, material factors arise that will affect the anticipated transaction prices or profits, and the applicant fails to notify the competent tax collection authority in writing as required under Article 25 of the Assessment Regulations, or fails to present amended documents and reports within the prescribed time period, the tax collection authority may terminate the APA approval procedure by issuing a written no-tice.
．If, after filing an APA application with the competent tax collection authority, but prior to the deadline for filing an annual income tax return for the first accounting period covered by the transactions that are the subject of the application, an applicant relocates to a loca-tion within the jurisdiction of another tax col-lection authority, the tax collection authority that originally accepted the application should transfer the case to the new competent tax collection authority, for the latter to continue processing the application. The second tax authority should also notify the original tax collection authority of the outcome. If the applicant relocates into the jurisdiction of an-other tax collection authority after the deadline for filing a final tax return for the first ac-counting period covered by the transactions concerned, the original tax collection authority should continue processing the application and sign any APA with the applicant, and should notify the second tax collection au-thority of the outcome.
．If the applicant seeks an extension of the pe-riod of validity of an APA in accordance with Article 32 of the Assessment Regulations, the assessment team of the competent tax collec-tion authority should conduct a review and assessment and render a decision.
．After an APA application has been discussed and approved by the APA review committee, a signed record of the conclusions should be submitted to the NTA director-general, and an APA with the contents prescribed by Article 28 of the Assessment Regulations should be signed with the applicant by the direc-tor-general or by a person granted signing authority by the director-general. If the committee determines that no APA can be offered, the applicant should be notified of this outcome in writing.
．If any dispute arises regarding an APA, the competent tax collection authority should in-vestigate to ascertain the facts and should at-tempt to resolve the dispute by negotiation. If such negotiation fails to resolve the dispute, the applicant or the tax collection authority may apply to the MOF for conciliation. If the dispute still cannot be resolved after such conciliation, the parties may terminate the APA by mutual agreement.
The advantage for a profit-seeking enterprise in applying for an advance pricing agreement is that by reaching prior agreement with the tax collec-tion authorities regarding the pricing or profit levels of its transactions with its related parties, and by filing income tax returns on that basis, the enterprise can avoid the risk of subsequent tax adjustments that may result in additional tax demands. Thus a profit-seeking enterprise may control tax exposure risks within acceptable levels. Based on the experience of other coun-tries in implementing transfer pricing tax sys-tems, APA applications have been increasing almost everywhere, and they now account for a considerable proportion of tax filings. The Di-rections will certainly be of great assistance both to taxpayers and to the tax authorities in defining the documents to be prepared and the procedures to be followed when filing or processing an APA application.