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Hong Kong: Guidance on APA procedures

Hong Kong: Guidance on APA procedures

The Inland Revenue Department (IRD) on 15 July 2020 released guidance concerning advance pricing arrangement (APA) procedures.

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The guidance—Departmental Interpretation and Practice Notes No. 48 (DIPN 48)—reflects the legislative changes in relation to the APA regime in Hong Kong and explains the streamlined APA process.

Key revisions in DIPN 48 concern the following:

  • Unilateral APA: Unilateral APA applications are now accepted to provide certainty for related-party transactions with jurisdictions which Hong Kong has no tax treaty for the avoidance of double taxation.
  • APA rollback: Requests for rollback of transfer pricing methodology under bilateral and multilateral APAs can be considered. This provides a means of resolving collateral issues and reduces the overall time needed for the APA process. The rollback option also helps to manage historical risk in that tax audits / transfer pricing inquiries from prior years may be resolved with less penalty pressure.
  • Streamlined APA process: The APA process has been streamlined from the original five-stage process to a three-stage process. The level of documentation required at the early stage has also been reduced. These overall revisions aim to improve the timeliness and efficiency of processing APA applications.
    • Stage 1 (six months): Early engagement – submission of request for APA early engagement six months before the proposed commencement date; setting up the APA team; preliminary discussion; submission of APA application; payment of deposit
    • Stage 2 (18 months): APA application – analysis and evaluation; further information gathering and interviews; negotiation mutual agreement with competent authorities; signing of APA; settlement of fees payable
    • Stage 3 (ongoing): Monitoring and compliance – disclosure; submission of annual compliance report; recordkeeping 
  • Application to permanent establishments and other transactions: The coverage of APAs has been extended to include the attribution of profits to a permanent establishment in Hong Kong (with a threshold of HK$20 million business profits per year) as well as transactions other than the sale or purchase of goods, provision of services and use of intangible properties (with a threshold of HK$20 million per year).
  • APA fees: Further guidance is provided regarding the fee payable for an APA application, including the provision of a fee estimate by any independent expert from whom the IRD would like to seek assistance. This enables taxpayers to better quantify the potential costs involved and accordingly decide whether the APA application can proceed or not. 
  • Other considerations: Considerations as to when a taxpayer may enter an APA and when the IRD will prioritize an APA application are also provided. 


KPMG observation

Tax professionals view DIPN 48 as reflecting the IRD’s commitment to further developing the APA program in Hong Kong and a response to the increase in transfer pricing controversies internationally as well as domestically following the OECD’s action plan addressing base erosion and profit shifting (BEPS). The indicators provided in DIPN 48 with respect to suitability of concluding APAs may allow taxpayers to better evaluate the feasibility of a potential APA before initiating the process. With these updates to the APA program, DIPN 48 is viewed as offering taxpayers an opportunity to lock in their transfer pricing positions in Hong Kong and counterparty jurisdictions and may thereby help resolve controversies. 
 

Revised DIPN 47

The IRD also on 15 July 2020 released the revised DIPN 47 that includes the “Convention on Mutual Administrative Assistance in Tax Matters” as one of the instruments for the exchange of information with other jurisdictions. The declaration for extending the application of the Convention to Hong Kong was registered at the OECD in May 2018, and the Convention entered into force in Hong Kong on 1 September 2018. The revised DIPN 47 reflects the latest international standard of exchange of information on request.


For more information, contact the Global Leader of KPMG’s Global Transfer Pricing Services:

Komal Dhall | +1 212 872 3089 | kdhall@kpmg.com

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