Hong Kong does not have a consolidated or group taxation regime.
Currently, there is no specific and comprehensive transfer pricing legislation in Hong Kong. While a few existing provisions in the IRO may be employed by the tax authority to tackle non-arm’s-length transactions, such provisions are primarily aimed at transactions with closely connected non-residents or tax avoidance transactions rather than specific legislation on transfer pricing.
There are two Departmental Interpretation and Practice Notes (DIPNs) issued by the HKIRD to address the transfer pricing issues in Hong Kong. DIPN 45 focuses on the administrative/procedural issues involved in providing double tax relief in a treaty context, such as when such relief is available and what are the procedures for claiming such relief. DIPN 46 outlines the HKIRD’s view on the legislative framework for transfer pricing in Hong Kong (including the statutory provisions in the IRO and the articles in a CDTA that are relevant to transfer pricing) and provides guidance on numerous transfer pricing related issues, such as the application of the arm’s-length principle and the acceptable transfer pricing methodologies, which are largely in line with the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines. The DIPN also spells out the documentation that taxpayers should consider retaining to support their transfer pricing arrangements and explains the interaction between the transfer pricing and sourcing rules in Hong Kong.
In general, the HKIRD currently adopts the arm’s-length principle and will seek to apply the OECD transfer pricing guidelines except where they are incompatible with the express provisions in the IRO. Transfer pricing rules will be implemented by the Hong Kong SAR Government through the enactment of Inland Revenue (Amendment) (No. 6) Bill 2017, which was gazetted on 29 December 2017. The proposed transfer pricing rules follow the OECD guidelines and adopt the arm’s-length principle. Domestic transactions without any Hong Kong tax advantage are excluded from the application of the transfer pricing rules. The Bill also introduces rules for transfer pricing documentation and advance pricing arrangement (APA) application. Once enacted, the transfer pricing rules and the APA statutory regime, as provided in the Bill, will have retrospective effect from 1 April 2018.
An APA programme is available in Hong Kong. The objectives of the APA programme are to help taxpayers obtain tax certainty on their complex or significant transfer pricing arrangements and reduce the risk of double taxation arising from related-party transactions. Resident enterprises or non-resident enterprises with a PE in Hong Kong may apply for an APA in respect of their transactions with associated enterprises under a CDTA, provided that certain conditions (including the threshold for an APA application) are met.
Currently, the HKIRD is primarily focused on bilateral APA or multilateral APA applications in respect of cross-border, related-party transactions involving countries that are CDTA partners with Hong Kong.
DIPN 48, issued by the IRD, provides guidance on various aspects of the APA regime, such as the timeframe and threshold for an APA application, the various stages involved in the APA process, an audit involving years covered by a concluded APA, and possible rollback of the transfer pricing methodology agreed under an APA to prior years. The appendices of the DIPN include various sample documents for use in an APA application.
Country-by-country (CbC) reporting regime
To implement the minimum standard under Action 13 of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan, the Hong Kong SAR Government has proposed to introduce CbC report filing requirements in Hong Kong in the Inland Revenue (Amendment) (No. 6) Bill 2017, gazetted on 29 December 2017. The Bill seeks to, among others, introduce a transfer pricing regulatory regime and mandatory three-tiered transfer pricing documentation requirement (including CbC report) in Hong Kong. The Bill has not yet been enacted into law as of the end of May 2018.
Key features of the proposed CbC reporting regime are summarised as follows:
- The Hong Kong ultimate parent entity of a multinational enterprise group with annual consolidated group revenues of 750 million euros (EUR) (i.e. about HKD 6.8 billion) or above (i.e. a reportable group) will be required to file a CbC return in Hong Kong.
- A Hong Kong entity of a reportable group that is not the group’s ultimate parent entity will also be required to file a CbC return in Hong Kong if the ultimate parent entity is not required to file a CbC report in its own jurisdiction of tax residence or if Hong Kong is not able to obtain the CbC report from that jurisdiction.
- The CbC report filing requirement will apply retrospectively to accounting periods beginning on or after 1 January 2018.
- Generally speaking, the deadline for filing a CbC return is within 12 months after the end of the accounting period to which the return relates. Where surrogate parent filing applies and a later deadline for filing CbC reports is prescribed in the laws or regulations of the jurisdiction of tax residence of the surrogate parent entity, the later deadline will be taken as the filing deadline in relation to the CbC return concerned.
Hong Kong does not have thin capitalisation rules. For restrictions on deduction of interest expenses, see Interest expenses in the Deductions section.
Controlled foreign companies (CFCs)
Hong Kong does not have a CFC regime.