On 13 July 2018, Hong Kong enacted detailed transfer pricing legislation through the gazettal of the Inland Revenue (Amendment) (No. 6) Ordinance 2018 ("the Amendment Ordinance").
The Amendment Ordinance codifies transfer pricing principles and implements certain measures under the Base Erosion and Profit Shifting package promulgated by the Organisation for Economic Co-operation and Development.
There are two key areas of change:
- CbC reporting - For accounting periods beginning on or after 1 January 2018, groups with an ultimate parent entity of a multinational enterprise group with annual consolidated group revenue equal to or exceeding €750 million (c. HK$6.8 billion) which is a Hong Kong tax resident must file country-by-country ("CbC") reports to the Inland Revenue Department ("IRD") for exchange with other relevant jurisdictions; and
- Additional documentation - for accounting periods beginning on or after 1 April 2018, additional documentation requirements will apply, and taxpayers must prepare master files and local files (subject to certain exemptions based on business size and volume of related party transactions).
The other provisions of the Amendment Ordinance relating to transfer pricing, relief consequential on transfer pricing adjustment, advance pricing arrangements, tax credit and profits tax concessions will apply to tax payable for years of assessment beginning on or after 1 April 2018. The provisions relating to the separate enterprise principle and taxation of income from intellectual property accrued to non-Hong Kong resident associates will apply to years of assessment beginning on or after 1 April 2019.
Certain amendments have been made during the legislative process to reflect comments, the most significant ones being:
- Certain domestic transactions have been exempted from complying with the arm's length principle;
- The size thresholds for exemption from preparing master and local files have been relaxed; and
- The requirement to prepare a local file for specified domestic transactions has been waived.
The IRD will provide further guidance through Departmental Interpretation Notes to facilitate compliance with the new requirements under the Amendment Ordinance.
What does this mean?
- The new legislation aligns Hong Kong's position with the far tougher stance on transfer pricing and related reporting and documentation requirements being adopted around the world.
- Hong Kong taxpayers should review their own affairs and seek professional advice on how they may be affected by the new legislation, and whether it will give rise to new or greater exposures.
- Pre-emptive and appropriate action will likely provide protection, but more detailed transfer pricing analysis and documentation will be required, and in-line with how thinking in the field is shifting.
How we can help?
With a combination of in-house, advisory and tax authority experience, Hogan Lovells has a team of transfer pricing specialists that can help Hong Kong taxpayers navigate their way through the new legislation, identify transactions, analyse potential areas of risk and opportunity, and provide insight on the approach of the tax authorities.