מחירי העברה: הונג קונג- מאי 2011

Department al interpretation and practice notes

In light of the recent changing taxation landscape in Hong Kong as a result of the increasing number of double taxation agreements (DTAs) entered into by Hong Kong, the Hong Kong Inland Revenue Department (IRD) released two Departmental Interpretation and Practice Notes (DIPN) in 2009, namely DIPN 46 – Transfer Pricing Guidelines – Methodologies and Related Issues, and DIPN 45 – Relief from Double Taxation due to Transfer Pricing or Profit Reallocation Adjustments. Although DIPNs do not have the force of law, these two DIPNS do outline the IRD’s current views and practices on (i) how transfer pricing principles will be applied in the territory and (ii) granting relief from double taxation due to a transfer pricing adjustment or profits reallocation under a DTA.

The main points to be noted regarding DIPN 45 and 46 are as follows:

• They follow the OECD Guidelines for transfer pricing, based on the arm’s length principle to determine the appropriate price for transactions entered into by associated enterprises;
• They do not specifically set a threshold (e.g. ownership percentage) to define an associated enterprise from a Hong Kong transfer pricing perspective;
• They apply to both domestic and international related party transactions;
• They do not provide ‘safe harbours’ that would assist in determining generally acceptable mark-up fees for routine services transactions;
• The most appropriate transfer pricing method should be selected for a particular case. Where both the transaction-based method and the profit-based method can be applied in an equally reliable manner, the transactions-based method is preferred;
• Taxpayers are free to apply a method not described in the OECD Guidelines to establish arm’s length transfer prices, provided that the arm’s length principle is followed and the choice of a non-OECD recognised method is justified;
• The sourcing principle will be used primarily to determine whether profit is taxable in Hong Kong. Once it is concluded that profits of an enterprise are sourced in Hong Kong, the IRD will not accept an adjustment of profits using transfer pricing principles unless a primary adjustment has been made under the Associated Enterprises Articles under the relevant DTA;
• Transfer pricing documentation is not mandatory but is encouraged;
• Relief from double taxation due to transfer pricing adjustments should be sought under the relevant provision of the Inland Revenue Ordinance within the 6-year statutory time limit and/or under the Mutual Agreement Procedure Articles of the relevant DTA, rather than claiming a current year deduction for a retrospective adjustment;
• The IRD can make transfer pricing adjustments within Hong Kong’s 6-year statutory time limit by reallocating profits or adjusting deductions by substituting an arm’s length consideration;
• The IRD takes the view that they can also impose a penalty for transfer pricing adjustments, at a maximum amount of three times the tax undercharged;
• Certain basic information (e.g. transaction amounts, jurisdictions of related parties, nature of transactions and relationship) are required to be disclosed in the annual Profits Tax Return.

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