On December 4, 2009, the Hong Kong Inland Revenue Department ("IRD") released the Departmental Interpretation Practice Note ("DIPN") 46, establishing the tax authority's interpretation and practices on transfer pricing methodologies and related issues.
KPMG China welcomes this policy decision as the release of DIPN 46, addresses transfer pricing more broadly and generally, and provides, for the first time, a comprehensive framework on the transfer pricing principles followed by the IRD in arriving at the arm's length position of a Hong Kong taxpayer. Thus, DIPN 46 provides the basis on which the IRD will assess the arm's length nature of taxpayers related party transactions, make transfer pricing/profit reallocation adjustments and determine whether a transfer pricing adjustment initiated by a party other than the IRD (i.e. by the taxpayer or another fiscal authority) is correct.
DIPN 46 is a necessary follow up to the previously released DIPN 45, which also deals with transfer pricing issues. DIPN 45 relates to transfer pricing strictly in the context of providing double taxation relief where the related party taxpayer is in a State which has a signed Double Taxation Agreement ("DTA") with Hong Kong. It does not, however, specify any transfer pricing methods or principles to be followed so as to secure agreement between Hong Kong and its treaty partner on any initial and corresponding transfer pricing adjustments.
"The release of DIPN 46 is an important milestone in the Hong Kong tax regime," said Steven Tseng, Partner in charge, China & Asia Pacific Leader, Global Transfer Pricing Services, KPMG China. "While the provisions of the Inland Revenue Ordinance (IRO) and case law effectively incorporate an arm's length requirement into the Hong Kong tax regime, there has not been any comprehensive guidance on transfer pricing in Hong Kong previously."
Kari Pahlman, Partner, Global Transfer Pricing Services, KPMG China added that, "Importantly, DIPN 46 contains many references to the Organisation for Economic Co-operation and Development's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and to international practices. Effectively, DIPN 46 adopts an OECD-based approach to transfer pricing, recognising the five common transfer pricing methods and also allowing for other, unspecified methods. It also contains certain guidelines in relation to transfer pricing documentation and provides for an explicit recommendation for taxpayers to prepare such documentation. We believe that the IRD will treat transfer pricing documentation as the starting point for discussions regarding transfer pricing classifications and methodologies in potential tax investigations and audits."
In addition, Nathan Richards, Director, Global Transfer Pricing Services, KPMG China added that "DIPN 46 does not address Advance Pricing Agreements ("APA") or, for example, cost sharing related issues. A robust APA program would assist Hong Kong in aligning itself with other trading nations. An APA program could provide taxpayers and the IRD with a powerful, forward-looking tool to resolve transfer pricing issues in cases where there is genuine difficulty and doubt in applying the arm's length principle".
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Note to editor
KPMG crowned Asia Pacific Firm of the Year. KPMG won three transfer pricing awards during 2009 International Tax Review's (ITR) third annual Asia Tax Awards ceremony at the Fullerton, Singapore, including the coveted Asia Transfer Pricing Firm of the Year award. The wins cap off a successful year for the firm's Global Transfer Pricing Services team, which also won China Transfer Pricing Firm of the Year and Hong Kong Transfer Pricing Firm of the Year.
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