Transfer Pricing
Country Summary
Hong Kong

This document summarizes the transfer pricing requirements and regulations in Hong Kong. Hong Kong’s transfer pricing regulations adhere to the OECD Transfer Pricing Guidelines. Relevant laws include the Inland Revenue (Amendment) No. 6 Bill, 2017, and various Departmental Interpretation and Practice Notes (DIPNs). The definition of “related party” is based on conditions similar to the OECD Model Tax Convention. Hong Kong allows Advance Pricing Agreements (APAs) and may request taxpayer compliance documentation in an audit situation. While there are no specific transfer pricing penalties, the Consultation Paper is considering introducing penalty provisions.


Harmonizing with OECD Guidelines

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.

Reference to Key Laws and Regulations

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.

Defining Related Parties

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.

Transfer Pricing Documentation Nature

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.

Advance Pricing Agreements (APAs)

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.

Audit Practices

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.

Transfer Pricing Documentation Level

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.

Choice of Transfer Pricing Method

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.

Economic Analysis and Inter-company Legal Agreements

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.

Financial Statements

Companies in Hong Kong must prepare financial statements adhering to Hong Kong Financial Reporting Standards. Auditing of financial statements is a requirement.

Mandatory Language

TP documentation should be submitted in English or Chinese.

Record Keeping

Taxpayers should retain business documents, including TP documentation, for seven years.

Penalties and Interest Charges

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.

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