Hong Kong: Transfer pricing and BEPS considerations—intangible property and R&D

Hong Kong: Transfer pricing and BEPS considerations

Companies that perform Hong Kong-based research and development (R&D) activities, or that own any intangible property (IP) developed or used in Hong Kong—and especially if that IP is owned by means of an offshore entity—need to determine if they are compliant and ready for implementation of the base erosion and profit shifting (BEPS) provisions. Companies that pay royalties to any related party also may be affected.

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Transfer pricing considerations

Hong Kong is a “centre of excellence” for a number of R&D activities. Given initiatives to promote Hong Kong as a premier IP trading hub in the region, many multinational enterprises (MNEs) with operations in Hong Kong may have a certain level of involvement in the “group IP.” Accordingly, these companies’ transfer pricing considerations may include: 

  • The roles and responsibilities of any Hong Kong-based R&D personnel and how their activities coordinate with any other IP-related activities in the group
  • Who truly has the capacity in controlling and managing the underlying R&D or IP risks
  • Whether the IP legal owner resides in a “no tax” or “low tax” offshore jurisdiction
  • Any split in legal and economic IP ownership structure
  • The structure of licensing or sub-licensing arrangement and how form and substance match

Questions to consider

In a post-BEPS world, additional care is required. At the same time, there may be opportunities for companies to streamline their value chain. An increasing number of companies in Hong Kong have started to address these issues. However, it is very important to determine that IP arrangements are carefully and correctly implemented. Questions to consider:

  • Transfers of IP—in accordance with BEPS, does it make sense to transfer of legal ownership to the entity that is principally responsible for the development, enhancement, maintenance, protection, and exploitation of the intangibles? What valuation issues may arise? 
  • Retain the IP offshore and retain legal ownerships structure—is it sufficient to determine the appropriate arrangement in attributing the economic returns of the IP to the economic owner(s), including options such as sub-licensing arrangement? 

Certain options can give arise to additional tax liabilities including withholding tax. Careful evaluation is therefore required when determining the best IP structure. The circumstances will be different for each company. Nevertheless, it is critical for companies to assess their transfer pricing risks and take appropriate steps with respect to their tax position on IP at the earliest opportunity.


Read a July 2016 report [PDF 151 KB] prepared by the KPMG member firm in Hong Kong

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