In 2016, the government accepted an invitation from the OECD to join the BEPS Project as an "associate", committing itself to the comprehensive package of reforms.
The immediate priorities for the Hong Kong government include introducing a more comprehensive transfer pricing regime with specific documentation rules. In line with this, a public consultation paper was released on October
Whilst we can foresee that the proposals will be subject to revisions before being
Within the public consultation, some of
- Codifying existing transfer pricing rules into tax legislation, applicable to both international and domestic related party transactions;
- Mandating the preparation of local file and master file transfer pricing documentation based on Action 13 of the BEPS initiative, with exemptions for smaller SMEs that meet two of the following three criteria: revenue not exceeding HKD 100 million ($12.9 million), assets not exceeding HKD 100 million, and a workforce not exceeding 100 people;
- Requiring companies with consolidated group revenues of over €750 million to prepare a country-by-country report;
- Providing for the exchange of country-by-country reports with jurisdictions with which Hong Kong has a double tax treaty or tax information exchange agreement (TIEA) in force;
- Introducing legislation to
formalisemutual agreement procedures and mandatory arbitration to resolve treaty disputes and to provide for the spontaneous exchange of certain information with tax treaty partners; and
- Extending the time period for claiming tax credits from two years to six years.
In terms of timing, the consultation process will end on December
How all of this will shape up will depend on the details of the resulting legislation. The Hong Kong government has stated that it will strive to maintain a simple, neutral and highly transparent tax regime. However, costly documentation mandated for domestic transactions would be a significant burden.
Moreover, the exemption proposals ignore the size of related party transactions, a threshold which is a more commonly applied in many other countries, with the result that companies with even minimal related party transactions may be burdened.
A further key challenge for Hong Kong is how it intends to reconcile its territorial tax regime with transfer pricing, noting that some European countries have declared that a territorial tax regime is itself a harmful tax practice.
However, what is clear is that transfer pricing will be implemented in Hong Kong and this means that robust transfer pricing support and documentation are becoming increasingly critical.
It is essential that Hong Kong taxpayers start to take action on reviewing their transfer pricing policies and show readiness to meet new Hong Kong transfer pricing requirements.
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