Hong Kong Codification of Transfer Pricing Part 2 (2/2)

Welcome to Our Transfer Pricing Series Part 2. In this 2-part Series, we will talk about the Hong Kong transfer pricing law. Part 1 video already covered the two common scenarios that IRD makes transfer pricing adjustments to Hong Kong entities.

Transfer pricing documentation is now compulsory in Hong Kong and comprises Master File, Local File and Country-by-Country reporting. Here is the table about the threshold for Master File and Local File in Hong Kong. For trading companies, as long as your annual revenue exceeds HK$400 million, total assets exceed HK$300 million and related party sales and purchase of goods exceed HK$220 million, you need to prepare Master File and Local File. Please refer to the table for all the details.

For Country-by-Country reporting, Hong Kong follows the International threshold of group consolidated revenues of HK$6.8 Billion (or EUR 750 Million).

On the other hand, there is a growing trend for MNCs to prepare benchmarking studies even when their size does not meet the above-mentioned threshold. We summarize three key reasons.

First, Potential Audit and Investigation by the IRD. In the event of significant gross profit margin fluctuation, Hong Kong entities are required by the IRD to carry out benchmarking study to justify their transfer pricing policy. Besides, benchmarking study is helpful in reaching a compromise settlement with the IRD in the case of failing to maintain proper accounting records.

Second, for the sake of allocating more profit in Hong Kong to reduce the effective tax rate, MNCs need to set up substance in Hong Kong. Meanwhile, the benchmarking study will allow them to study the maximum allowed profits to be allocated to the Hong Kong entities.

Third, for Initial Public Offering in Hong Kong.... Hong Kong is famous for its capital market... Transfer Pricing has now become a standard question from the authorities for corporations going for IPO in Hong Kong. Tax opinion from external tax advisor is required to justify the group transfer pricing policy.

As last piece of advice, Permanent Establishment Risk has been a headache for MNCs. Very often, global tax authorities will accept the tax dispute to be resolved via transfer pricing method. As such, a thorough transfer pricing policy will be a big help to reduce global tax risk of MNCs.

If you would like to know more about the latest transfer pricing law, or seek tax advice from our tax experts, please do not hesitate to contact us by email or phone. Thank you.