Hong Kong’s New Transfer Pricing Regime

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By Paul Dwyer, Director, Head of International Tax and Transfer Pricing

On December 29, 2017, Hong Kong gazetted the Inland Revenue (Amendment) (No. 6) Bill 2017 (the Amendment Bill). The Amendment Bill, which was formally introduced into the Legislative Council on January 10, represents a crucial step in the development of Hong Kong’s transfer pricing regulatory and enforcement regime.

The objectives of the Amendment Bill are to codify transfer pricing rules into Hong Kong’s Inland Revenue Ordinance (IRO), introduce transfer pricing documentation requirements, and implement other measures set out in the Organisation for Economic Co-operation and Developments (OECD’s) Base Erosion and Profit Shifting (BEPS) program.

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Hong Kong’s Transfer Pricing rules

Hong Kong’s new transfer pricing regime introduces a Fundamental Transfer Pricing Rule (FTPR) that requires intercompany transactions between associated enterprises to be conducted on an arms-length basis. In other words, the transactions entered into must be consistent with those that would have been entered into between non-related parties operating at arm’s length from one another. The FTPR applies from April 1, 2018.

Applying the FTPR

In applying the FTPR, the Hong Kong Inland Revenue Department (HKIRD) has the power to adjust a taxpayer’s profits upwards or losses downwards on non-arm’s length transactions with associated enterprises where a Hong Kong tax benefit has been obtained.

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.


Where taxpayers are assessed to have filed returns with transfer prices not consistent with the arm’s length principle, administrative penalties ranging from HK$10,000 to HK$100,000 (US$1,277 to US$12,767) plus an adjustment amount up to the amount of tax adjusted may be imposed.

Transfer pricing documentation

A key component of the amendment bill is the adoption of the OECD’s three-tier documentation structure consisting of the following:

  • Country-by-Country Reporting (CbCR);
  • Master File; and
  • Local File.

Ultimate parents of multinational groups that are resident in Hong Kong with a consolidated turnover of HK$6.8 billion (US$868 million) will be required to prepare and submit CbCR for accounting periods beginning on or after January 1, 2018, with the documents needing to be filed 12 months after the end of the accounting period.

All companies carrying on a trade or business in Hong Kong are required to prepare master and local file reports for accounting periods beginning on or after April 1, 2018 unless they meet one of the documentation preparation thresholds available.

Professional-Service_CB-icons-2017 Transfer Pricing Solutions from Dezan Shira & Associates

Key takeaway

The Amendment Bill establishes a more comprehensive transfer pricing regime than Hong Kong previously had, and brings the Special Administrative Region closer in line with OECD standards.

Taxpayers of all sizes, engaged in either domestic and/or cross-border intercompany transactions of any size, will be required to ensure that their intercompany transaction prices are at arm’s length and compliant with the new regulations.

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