All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Hong Kong: Transfer pricing legislation expected by end of 2017






The Hong Kong government issued its consultation report on measures to counter base erosion and profit shifting (BEPS) on July 31 2017. The report summarises the feedback received during the public consultation exercise to gauge views on the implementation of the OECD's anti-BEPS initiatives that ended on December 31 2016. More specifically, it explains how the government intends to implement a new transfer pricing regime in Hong Kong, which includes mandating the preparation of transfer pricing documentation based on the three-tier standardised reporting approach (including a master file, a local file and a country-by-country (CbC) report).

According to the report, there is overwhelming support from those who responded to the consultation exercise to codify transfer pricing rules into the law.

The government plans to introduce a bill for this purpose into LegCo by the end of 2017. The bill will refer to the OECD's transfer pricing guidelines and clarify which version of these guidelines should be followed. The Inland Revenue Department (IRD) will subsequently issue a departmental interpretation and practice note (DIPN) to facilitate the understanding of the "fundamental transfer pricing rule" in the future. This rule essentially empowers the IRD to adjust the profits or losses of an enterprise that engages in non-arm's-length dealings with associated enterprises.

Updated proposals

The report sets out a number of key updated proposals, most notably the relaxation of exemption thresholds for the preparation of master and local files, which thereby reduces the compliance burden for taxpayers. Specifically, taxpayers will not be required to prepare master and local files if they meet either one of the following two sets of exemption:

1) Size of business (any two of three criteria per financial year):

  • Total annual revenue less than or equal to HK$200 million ($25.6 million) (originally HK$100 million);

  • Total assets less than or equal to HK$200 million (originally HK$100 million); or

  • Employees less than or equal to 100.

2) Related party transactions (for that particular category of transactions per financial year):

  • Transfers of properties (excludes financial assets/intangibles) less than HK$220 million;

  • Transactions in financial assets less than HK$110 million;

  • Transfers of intangibles less than HK$110 million; or

  • Any other transactions (e.g. service income/royalty income) less than HK$44 million.

So far, as the threshold for preparation of local files is concerned, the rules now refer to the size of related party transaction amounts, with the amounts generally mirroring those that apply in mainland China. If a taxpayer is exempted from preparing all types of local files set out in the above, it is also not required to prepare a master file. This is also in line with mainland China's exemption provisions.

Although the government has relaxed these initial provisions, it has maintained its stance on other issues, namely stating that domestic transactions will still be included in the transfer pricing regime. There is also no change to the reporting threshold for filing CbC reports, which remains at €750 million ($899 million), or about HK$6.8 billion. Parent surrogate filing implementation issues will be addressed in an upcoming DIPN.

Penalties for incorrect tax returns relating to non-arm's-length pricing remain the same as those that apply generally for under-reporting in other tax contexts. These can amount up to 300% of the tax undercharged if "reasonable excuse" is lacking, or there is "wilful intent to evade tax". Unfortunately, the preparation of OECD-compliant transfer pricing documentation will not automatically lead to a reduction of penalties. Rather, conditions for penalty reduction will be based on the actual facts and circumstances, with transfer pricing documentation being only one of the factors to be considered. There is no specific mention of interest being charged in addition to penalties.

The implementation of statutory transfer pricing rules will likely lead to more disputes, thus there is an anticipated rise in demand for advance pricing agreements (APAs) and for more certainty. The bill will give the IRD more flexibility to cater for unilateral, bilateral and multilateral APAs, whereas currently only bilateral APAs and multilateral APAs are considered. Further details of the proposed dispute resolution mechanism will be set up in the DIPN.

Other key points include:

  • Specific provisions will be introduced to ensure that a person who develops, enhances, maintains, protects and exploits intellectual property in Hong Kong (so-called DEMPE functions) will be compensated with a return calculated on an arm's-length basis;

  • Hong Kong will not impose thin capitalisation rules;

  • The bill will not contain any safe harbour rules;

  • The time bar for claiming tax credits will be extended to six years; and

  • Taxpayers will be required to take all reasonable steps to minimise the amount of foreign tax payable before claiming a tax credit.


The government has reiterated that it will take a pragmatic approach to minimise the compliance burdens on businesses arising from the new transfer pricing regime.

In anticipation of these coming mandatory transfer pricing documentation requirements, taxpayers in Hong Kong will need to begin proactively assessing, if they have not already done so, their potential compliance obligations. Also, taxpayers will need to consider carefully the impact of their related-party domestic transactions within Hong Kong as well.

Lewis Lu ( and Curtis Ng (

KPMG China

Tel: +86 (21) 2212 3421


More from across our site

But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
This week the Biden administration has run into opposition over a proposal for a federal gas tax holiday, while the European Parliament has approved a plan for an EU carbon border mechanism.
12th annual awards announce winners
Businesses need to improve on data management to ensure tax departments become much more integrated, according to Microsoft’s chief digital officer at a KPMG event.
Businesses must ensure any alternative benchmark rate is included in their TP studies and approved by tax authorities, as Libor for the US ends in exactly a year.
Tax directors warn that a lack of adequate planning for VAT rule changes could leave businesses exposed to regulatory errors and costly fines.
Tax professionals have urged suppliers of goods from Great Britain to Northern Ireland to pause any plans to restructure their supply chains following the NI Protocol Bill.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree