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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


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