Hong Kong: Management fee, head office recharge arrangements under scrutiny

Hong Kong: Management fee, recharge arrangements

Hong Kong’s Inland Revenue Department continues to challenge transfer pricing arrangements with regards to management fee or head office recharges, and there are reports that the tax authorities are requesting sophisticated information on such cost-recharge arrangements.

Related content

Some common issues identified by the tax authorities with regards to companies with intercompany service and cost-recharge arrangements include:

  • Costs incurred for the provision of support or regional services not being fully allocated out to the relevant group entities
  • Lack of support or proof not evident to the tax authorities that there is no duplication of services
  • Challenges in determining stewardship or shareholder costs that are non-allocable to service recipients
  • Consistency between charges at various level within a group (i.e., global, regional, and local country level)
  • Potential conflicts between outsourcing rules in certain countries with transfer pricing policies
  • Distortion to the allocation matrix due to business restructuring or expansion
  • Additional requirements in certain regulated industries, such as financial services

KPMG observation

The tax authorities are not only concerned with the reasonableness of these related-party transactions, but with respect to some special industries, there may be additional scrutiny from other regulatory bodies regarding the reasonableness of the charges. As a result, a broader approach may be required to address challenges from multiple areas. Many companies may believe that a reasonable allocation model is in place, but the authorities may question whether that policy addresses all the key areas. 

 

Read an August 2016 report [PDF 152 KB] prepared by the KPMG member firm in Hong Kong: Closer scrutiny on management fee and head office recharge arrangements

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