The Hong Kong Inland Revenue Department (“IRD”) has formulated its procedures to review transfer pricing documentation. First round of compliance reviews is expected to commence in Year 2021.

Standard form of “Transfer Pricing Documentation – Master File and Local File” (“Form IR1475”) will be used to gather high-level information of taxpayers’ transfer pricing policies before requesting the submission of Master File and Local File. Form IR1475 is essentially a summary of Master File and Local File. Computerized Form IR1475 will serve as a tool for the IRD to quickly identify high risk taxpayers with “abnormal” transfer pricing policies as compared to industry peers.

The issue of Form IR1475 signifies the IRD’s determination to review taxpayers’ transfer pricing policy. The IRD may start to issue enquiry letter to obtain Master File and Local File within one year from the stipulated due date of preparing the documentation. The expected dates for the IRD to issue the enquiry letter are: -

Points to Note

1. This policy is going to impact taxpayers who do not adhere to the preparation due date and prepare Transfer Pricing Documentation ONLY upon request. As the IRD only requests for a summary of the Documentation which should have already been prepared, it is likely that the IRD will only allow one month to complete the Form IR1475 even when multiple years of Transfer Pricing Documentation data are required at the same time.
    
2. Failure to comply with the Court order to prepare and retain a Master and a Local File without reasonable excuse may be subject to a penalty up to HK$100,000 and raise the attention of the IRD on the taxpayer’s related party transaction.
    
3. Last but not least, the maximum penalty arising from Transfer Pricing Adjustment would be ONE TIME of tax uncercharged. No penalty will be imposed if reasonable effort has been exerted. Pursuant to DIPN 59, failure to maintain proper Transfer Pricing documentation is the first quoted example for failure to exert reasonable effort.