A Comparative Study Of Advance Pricing System And Its Implications To China

International intra-firm transactions have been markedly increasing over the past decade. This trend has provided some businesses with an incentive to restructure their business in the purpose of shifting profits through transfer pricing. The international transfer pricing risks faced by multi-national enterprises have increased dramatically today. The traditional methodologies to cope with the risks turn out to be unsatisfactory largely due to the uncertainty occurred. The creation of APA was regarded as one break-through during the tax control history.On the side of OECD, the above system was given the name Advance Pricing Arrangements ("APAs") in 1995 OECD Transfer Pricing Guidelines. It was the first time that APAs appeared in OECD documents. After 4 years of efforts, in 1999 APAs was established in great details as a new Annex to the 1995 OECD Transfer Pricing Guidelines which provides guideline on conducting advance pricing arrangements under the mutual agreement procedure ("MAP APAs"). In this guidelines, APAs was defined as "an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time.'Advance Pricing Arrangement has made tremendous development in terms of both legislation and practice since it was took as one of the adjusting methods in our country. What brings it to a new level of development is the issue of the Enterprise Income Tax Law of the People's Republic of China in 2008 and the Implementation measures of Special Tax Adjustments (Provisional) in January 2009.However,as a new-born system of only twenty years, Advance Pricing Arrangement still remains much to improve concerning the mechanism establishment. This article is written in an attempt to discuss the short comings of APA system in China and make new suggestions to the APA system in our country through comparative study of International experience.This essay consists of four chapters.Chapter 1 first discusses the definition, basic principles of advance pricing, then go on with the disadvantages of traditional transfer pricing methods and the unique advantages of advance pricing.Chapter 2 first makes a brief introduction of the international legislation on APA, focus on the legislation of America and OECD, including its implementation procedures and reforms. Further, the author makes a comparative analysis of the America APA system and the OECD APA system in the attempt to figure out the common rules for China's reference. When analyzing the APA system in America, the author referred to 2004,2006,2008 Internal Procedures and also IRS APA Report issued in March,2010.Chapter 3 focuses on the APA reforms and current legislation in China. Basically, there are four problems in China concerning the application of APA, usage of information, lack of APA talents and lack of detailed rules in some aspects.Chapter 4 based on the current Implementation measures of Special Tax Adjustments (Provisional), poses some suggestion to the APA system in China through the reference of international experiences. Such as establishing flexible APA procedures, cultivating APA talents, establishing international information exchange system and information management system, also adding operational rules to our APA system.The last part makes a summary of the whole essay, and also expresses the author's wish to continually keep an eye on the APA developments and make further improvement suggestions to the APA system.