Transfer pricing

The Inland Revenue (Amendment) (No. 6) Ordinance 2018 (“the Amendment Ordinance”), which was gazette on July 13, 2018, established a more comprehensive transfer pricing regime in Hong Kong. It codified the transfer pricing principles, implemented certain measures under the Base Erosion and Profit Shifting (BEPS) package and aligned the provisions in the Inland Revenue Ordinance (Cap. 112) with international tax requirements.

Fundamental transfer pricing rule

On the basis of the arm’s length principle, the Amendment Ordinance introduced fundamental transfer pricing rules (FTPR) that further empower the Inland Revenue Department. This includes the ability to adjust the profits or losses of an enterprise where the actual provision made or imposed between two associated persons departs from the provision that would have been made between independent persons and has created a tax advantage.

The Amendment Bill does not contain any safe harbor rules in respect to the FTPR. What this means is that taxpayers of all sizes, engaged in either domestic and/or cross border intercompany transactions of any size, will be required to ensure that the prices are at arm’s length.

Transfer pricing documentation

The Amendment Ordinance further introduced mandatory documentation requirements based on the three-tiered approach of Country-by-Country (CbC) Reporting, Master File, and Local File.

Requirements and exemption thresholds for Master File and Local File

Hong Kong entity of a group will be required to prepare a Master File and a Local File for each accounting period beginning on or after April 1, 2018. The Master File and Local File must be prepared within nine months after the end of the entity’s accounting period, and be retained for a period of no less than seven years after the end of the accounting period of the entity. The information items to be included within the Master File and the Local File are largely in- line with the Organization for Economic Co-operation and Development (OECD) guidance.

Taxpayers will not be required to prepare Master and Local Files if they meet either of the following two sets of exemptions:

1) Based on size of business (any two of the three criteria)

Threshold (million HK$) per financial year

Total revenue


Total assest




If all of an entity’s controlled transactions are exempted by the above related party transaction criteria, the entity is not required to prepare both the Master File and the Local File.

2) Based on controlled transactions (for that particular category of transactions)

Threshold (million HK$) per financial year

Transfer of properties (excluding financial assets/intangibles)


Transactions in financial assets


Transfer of intangibles


Any other transactions (e.g. service income/royalty


Country-by-Country reporting

Country-by-Country (CbC) Reporting is a minimum standard formulated by OECD under Action 13 of the Base Erosion and Profit Shifting (BEPS) Package. In Hong Kong, the requirements for filing a CbC Return, which includes a CbC Report, only apply to a multinational enterprises group (MNE group) whose annual consolidated group revenue reaches the specified threshold amount, i.e. HK$6.8 billion (Reportable Group).

[video file='https://content.jwplatform.com/videos/o48NjVEJ-XXceGyBw.mp4' image='https://resource.dezshira.com/resize/900x506/Misc/banners/web_2.jpg' title='How BEPS 2.0 is Reshaping the Global Tax Landscape for Multinational Enterprises in Asia']

In respect of a Reportable Group, the primary obligation of filing a CbC Return is on the ultimate parent entity (UPE) resident in Hong Kong and not on any other constituent entities resident in Hong Kong (Hong Kong Entities). The Hong Kong UPE is required to file a CbC Return for each accounting period beginning on or after January 1, 2018.

A Hong Kong Entity of a Reportable Group whose UPE is not resident in Hong Kong is subject to a secondary obligation of filing a CbC Return under certain conditions. Each Hong Kong entity of a Reportable Group must file a written notification informing within three months after the end of the accounting period.

The deadline for filing a CbC Return is 12 months after the end of the relevant accounting period or the date specified in the assessor’s notice, whichever is the earlier. A service provider (SP) may be engaged to file a CbC Return or the related notification.

AEOI reporting

In September 2014, Hong Kong indicated its support for implementing automatic exchange of financial account information (AEOI) on a reciprocal basis with appropriate partners, with a view to commencing the first exchanges from 2018.

[tips title="Did You Know"]Under the AEOI standard, financial institutions are required to identify financial accounts held by tax residents of reportable jurisdictions or held by passive non-financial entities whose controlling persons are tax residents of reportable jurisdictions in accordance with due diligence procedures.[/tips]

Required information of these accounts has to be collected and furnished to the Department. Such information will be exchanged on an annual basis.

“Tax residents of reportable jurisdictions” refer to those who are liable to tax by reason of residence in the jurisdictions. In general, whether or not an individual is a tax resident of a jurisdiction is determined by having regard to the person’s physical presence or stay in a place (e.g. whether over 183 days within a tax year) or, in the case of a company, the place of incorporation or the place where the central management and control of the entity is exercised. Account holders may be requested to provide self-certifications on their personal information including tax residence, so as to enable financial institutions to identify the reportable accounts.

Hong Kong has expanded the list of reportable jurisdictions to cover 75 reportable jurisdictions for the more effective implementation of the arrangement relating to AEOI. These jurisdictions include all EU member states, all of Hong Kong’s tax treaty partners that have committed to CRS, and other jurisdictions that have expressed an interest to the OECD in exchanging CRS information with Hong Kong.

Hong Kong will only conduct AEOI with a reportable jurisdiction when an arrangement is in place with the reportable jurisdiction concerned to provide the basis for exchange.

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