Wednesday, 24 November 2010

Second Bilateral APA in Shanghai represents several significant breakthroughs

Following swiftly on the heels of the first Bilateral Advance Pricing Arrangement (“BAPA”) completed in Shanghai, a second BAPA was recently completed for a Shanghai entity in the high-tech industry. This BAPA establishes two key firsts: China’s first BAPA for an entity operating in the Waigaoqiao Free Trade Zone and China’s first BAPA for a Foreign-Invested Commercial Enterprise (“FICE”).
The FICE is a variant of the Wholly Foreign Owned Enterprise (“WFOE”) introduced after China’s ascension to the World Trade Organization (“WTO”), acting as a way to open China’s market to foreign goods, since a FICE can distribute its products into the China market as well as to foreign markets. Before the introduction of the FICE, WFOEs could not distribute directly into China. Meanwhile, Waigaoqiao is the oldest and largest free trade zone in Mainland China, housing over 10,000 companies, including over 111 Fortune 500 companies, representing 94 countries and USD 16 billion in investment.
The taxpayer has used China as a manufacturing base, with the FICE as the key distribution arm for its high-tech products in China. As this was the first APA case of this nature, China’s State Administration of Taxation (“SAT”) adopted a cautious approach. Several technical issues were discussed in detail, including locations savings and market premium, two issues which the SAT continues to highlight as key for transfer pricing in China. The interest of the tax authorities in the case may also signal more scrutiny for the distribution sector, as well as indirect taxes such as customs duty which are important for distribution entities. Currently there is no automatic system to relieve the potential for “double taxation” exposure on customs duty and income tax i.e. the potential to have mismatched adjustments or policies relative to customs duty and income tax lead to potential significant tax risks.
Despite all these complications, the case took less than two years to complete. The tax authorities from both jurisdictions involved took a very pragmatic approach to address these issues, with several bases for potential agreement considered before eventually settling on an innovative solution that was acceptable to both sides. 
China has so far concluded 15 BAPAs with several of its major trading partners.

Fuente: PKN