Meaning
Administrative transitions for taxpayers with existing unilateral advance pricing agreements allow for the expansion of these arrangements into bilateral frameworks involving the State Taxation Administration. A bilateral advance pricing agreement conversion is used when a company seeks to eliminate double taxation by involving a foreign tax authority in the agreement.
Unilateral Transition
The conversion process begins when an enterprise with an active or pending unilateral agreement submits a formal request to the Chinese tax authorities to include a foreign jurisdiction. This request must prove that the transaction involves a treaty country.
Authority Consultation
Negotiations between the State Taxation Administration and the equivalent authority in a treaty partner country determine the transfer pricing methodology and the resulting profit allocation. This dialogue can take several years. It requires a detailed exchange of information between the two nations to reach a consensus on the arm’s length price.
The final agreement binds both tax authorities to a specific tax treatment for the covered transactions.
Retrospective Application
Taxpayers often request that the terms agreed upon in the bilateral advance pricing agreement conversion apply to previous tax years that remain open for audit. This roll back mechanism provides certainty for historical periods. It reduces the risk of future audits on the same transaction types.
