Hong Kong’s approach to transfer pricing aligns with the OECD Transfer Pricing Guidelines, providing a comprehensive framework for multinational corporations. This alignment ensures consistency in applying transfer pricing rules.
Key elements of Hong Kong’s transfer pricing framework include the Inland Revenue (Amendment) No. 6 Bill, 2017, DIPN 46 (2009), DIPN 45 (2009), and DIPN 48 (2012). The Bill, in particular, introduced critical measures in response to the OECD’s BEPS initiative and is applicable from April 1, 2018.
The concept of “related parties” is based on the OECD Model Tax Convention criteria. If an enterprise of one Contracting State directly or indirectly participates in the management, control, or capital of an enterprise in another Contracting State, or the same persons participate in both enterprises, altering commercial or financial relations from those of independent entities, it may result in the inclusion of profits and taxation.
In an audit situation, the Inland Revenue Department (IRD) might request transfer pricing policy documents and evidence of adherence to the arm’s length principle. Local input from the taxpayer is expected to demonstrate compliance, making globally prepared documentation a standard practice.
Hong Kong permits bilateral and multilateral APAs, with unilateral agreements considered in specific cases. To qualify, entities involved in controlled transactions must meet annual thresholds. The duration of an executed APA generally spans three to five years, and it may take up to 18 months or longer to negotiate.
The IRD may investigate significant related party transactions, profit volatility, transactions with “tax haven” jurisdictions, and group structures prone to double non-taxation, among other factors.
While not mandating specific documentation submission, the IRD encourages contemporaneous documentation following OECD Transfer Pricing Guidelines. An APA necessitates the preparation and submission of an annual compliance report, supported by financial analysis.
Hong Kong accepts the OECD’s recommended transfer pricing methods, including traditional transaction methods like CUP, cost-plus, and resale price, and transactional profit methods such as profit split and transactional net margin. When equally reliable, traditional transaction methods are preferred.
Hong Kong does not provide specific guidance on economic analysis or instructions to tax authorities. Legal agreements formalizing financial relationships between entities hold less importance under the OECD’s 2017 Guidelines.
Companies in Hong Kong must prepare financial statements adhering to Hong Kong Financial Reporting Standards. Auditing of financial statements is a requirement.
TP documentation should be submitted in English or Chinese.
Taxpayers should retain business documents, including TP documentation, for seven years.
While specific transfer pricing penalties do not exist currently, the Consultation Paper is considering introducing such provisions in the Inland Revenue Ordinance. Penalties for non-compliance with new TP documentation requirements and CbC reporting are under review. General penalties in cases of tax evasion can be significant. The Consultation Paper is also exploring daily fines for continuing offenses.