Changing Tax Landscape on Transfer Pricing in Hong Kong: Compliance and Risk

The Organization for Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) project has changed the tax landscape worldwide towards greater transparency and co-operation. As an associate to the BEPS initiative, Hong Kong has been updating its tax legislation to meet the international standards. Recent measures introduced by the Inland Revenue (Amendment) (No. 6) Ordinance 2018 (the BEPS Ordinance), which was passed on 13 July 2018, are changing the Hong Kong tax landscape. This legislation has implemented, among others, a comprehensive transfer pricing (TP) regulatory regime and TP documentation requirement in Hong Kong. The BEPS Ordinance codifies Hong Kong’s first TP rules and requires that the rules be interpreted in a way which is consistent with the OECD guidelines. It introduces the arm’s length principle and the three-tier documentation of master file, local file and country-by-country report. The arm’s length principle is applicable for transactions made between two associated persons for both domestic and cross-border transactions, regardless of the materially and nature of the transactions. However, certain domestic transactions are excluded. This paper examines the latest TP regulatory regime in Hong Kong. It also evaluates its compliance considerations, risks and implications for entities in Hong Kong which have cross-border inter-company arrangements. The outcome of this paper will assist entities in Hong Kong to manage their TP issues in the ever-challenging environment in an effective manner.