Hong Kong has published a guidance page on Transfer Pricing Documentation – Master File and Local File, which provides an overview of the requirements, the relevant thresholds/exemptions, the required content, the timing for preparation, etc.
Overview of Transfer Pricing Documentation
Each entity in Hong Kong is required to prepare transfer pricing documentation in the style of the master file and local file documented in Action 13 of the Base Erosion and Profit Shifting (BEPS) Action Plan. However, an entity will be exempt from these requirements if it meets at least two of the following three criteria:
- Revenue for the accounting period does not exceed HK$400 million
- Total assets for the accounting period do not exceed HK$300 million
- Average number of employees during the accounting period does not exceed 100
These generous thresholds ensure a significant number of small to medium-sized Hong Kong taxpayers are exempted from preparing Hong Kong transfer pricing documentation.In addition to these entity-size thresholds, related party transactions can be excluded from the local file if they do not exceed the following amounts:
- Transfers of properties (moveable or immoveable, but excluding financial assets and intangibles): HK$220 million
- Transactions in respect of financial assets or intangibles: HK$110 million
- Other transactions: HK$44 million
However, under the new practice notes such threshold applies less weight to the formal thresholds as a test of whether documentation should be prepared, emphasizing that “although not required to prepare a comprehensive master file and local file, a Hong Kong entity not subject to the transfer pricing documentation rules in Division 2 of Part 9A is encouraged to keep documentation which can achieve the objectives of the relevant files” and “. In such case, the Hong Kong entity will have a better proof that it has made reasonable efforts to determine the arm’s length amount.
Apart from the threshold, under the updated guidelines, the government intends to align the content of local file and master file with the BEPS action 13. For instances, it is necessary to disclose the value drivers of the group, groups’ intangibles, business restructuring occurred within the group in the master file. The general content for master file most likely mirror the appendix of the 2017 TP guideline. Further for local file, the company is required to disclose the business environment information include key competitors, intercompany transaction, and detail description of the application of the arm’s length principle.
Time to Prepare and Submit Master File and Local File
Under section 58C(2)(a) of the IRO, a Hong Kong entity must prepare a master file and a local file no later than 9 months after the end of its accounting period. The Hong Kong entity has to declare in the profits tax return and supplementary form S2 whether a master file and a local file have to be prepared. The master file and the local file should be ready for submission upon request by the Assessor.
Source: Inland Revenue Department