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Hong Kong: Transfer pricing in budget speech; proposed legislation expected

Hong Kong: Transfer pricing in budget speech

Hong Kong’s Financial Secretary on 22 February 2017 delivered the budget speech to the Legislative Council, and the government’s plan for implementing a statutory transfer pricing regime in Hong Kong was briefly mentioned in this year’s budget speech.


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In particular, the Financial Secretary re-affirmed Hong Kong’s position with regard to the package of measures put forward by the Organisation for Economic Cooperation and Development (OECD) to address base erosion and profit shifting (BEPS), and noted that Hong Kong has joined the OECD’s inclusive framework for implementing the BEPS package and is expanding its network of comprehensive avoidance of double taxation agreements.

Proposal for transfer pricing regime

The Hong Kong Inland Revenue Department currently relies on general anti-avoidance provisions in the Inland Revenue Ordinance to address transfer pricing matters. However, application of these provisions is limited, and not always effective.

The Hong Kong government conducted a public consultation exercise in late 2016 concerning the BEPS initiatives and for the adoption of a formal transfer pricing regime in Hong Kong with mandatory documentation requirements—including country-by-country reports for larger multinational groups.

The consultation included proposals for:

  • Codifying transfer pricing rules in Hong Kong’s tax law based on the arm’s length standard that would apply beyond payments for assets and services to cover financial and business arrangements (including loans and cost contribution arrangements)
  • Requiring preparation of transfer pricing documentation based on the three-tier country-by-country (CbC) reporting approach (including a Master file and a Local file)
  • Introducing penalties for “incorrect returns” when there is non-arm’s length pricing and/or for failing to comply with the documentation requirements
  • Exchanging CbC reports with other jurisdictions with which Hong Kong has concluded a tax treaty as well as competent authority agreements
  • Providing a statutory basis for the existing advance pricing arrangement (APA) regime
  • Amending Hong Kong tax treaties to reflect the OECD coordinated multilateral instrument (to counter the use of hybrid entities and instruments, prevent treaty abuse and the artificial avoidance of permanent establishment status, and enhance the dispute resolution between treaty partners)
  • Countering treaty abuse by adopting the “principal purpose test” rule in income tax treaties
  • Introducing legislation to formalize the adoption of mutual agreement procedures (MAP) and mandatory arbitration to resolve treaty disputes
  • Providing for “spontaneous” exchanges of past and future tax rulings with tax treaty partners
  • Enhancing Hong Kong’s tax credit system by extending the time for claiming credits from two years to six years

KPMG observation

Tax professionals have observed there are certain areas of the consultation paper that have not yet been clarified, and thus hope that any future transfer pricing legislation would address or clarify: (1) the definition of “related party”; (2) what would constitute an “incorrect tax return” that could trigger penalties; (3) the interaction between the Hong Kong source rules and a transfer pricing regime; and (4) the dates for filing the Master file and the Local file documentation. 

The Deputy Commissioner of the Inland Revenue Department recently indicated that draft transfer pricing legislation has been prepared, and is ready to be presented to the Legislative Council. It appears the government intends to approve new transfer pricing law this year, with a possible release in the first half of 2017. The tax authorities also have confirmed that CbC reports have already been officially included in the automatic exchange of information framework.


Read a February 2017 report [PDF 2.4 MB] prepared by the KPMG member firm in Hong Kong: Budget Summary 2017-2018

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