Hong Kong’s Financial Secretary on 22 February 2017 delivered the budget speech to the Legislative Council, and the government’s plan for implementing a statutory transfer pricing regime in Hong Kong was briefly mentioned in this year’s budget speech.
In particular, the Financial Secretary re-affirmed Hong Kong’s position with regard to the package of measures put forward by the Organisation for Economic Cooperation and Development (OECD) to address base erosion and profit shifting (BEPS), and noted that Hong Kong has joined the OECD’s inclusive framework for implementing the BEPS package and is expanding its network of comprehensive avoidance of double taxation agreements.
The Hong Kong Inland Revenue Department currently relies on general anti-avoidance provisions in the Inland Revenue Ordinance to address transfer pricing matters. However, application of these provisions is limited, and not always effective.
The Hong Kong government conducted a public consultation exercise in late 2016 concerning the BEPS initiatives and for the adoption of a formal transfer pricing regime in Hong Kong with mandatory documentation requirements—including country-by-country reports for larger multinational groups.
The consultation included proposals for:
Tax professionals have observed there are certain areas of the consultation paper that have not yet been clarified, and thus hope that any future transfer pricing legislation would address or clarify: (1) the definition of “related party”; (2) what would constitute an “incorrect tax return” that could trigger penalties; (3) the interaction between the Hong Kong source rules and a transfer pricing regime; and (4) the dates for filing the Master file and the Local file documentation.
The Deputy Commissioner of the Inland Revenue Department recently indicated that draft transfer pricing legislation has been prepared, and is ready to be presented to the Legislative Council. It appears the government intends to approve new transfer pricing law this year, with a possible release in the first half of 2017. The tax authorities also have confirmed that CbC reports have already been officially included in the automatic exchange of information framework.
Read a February 2017 report [PDF 2.4 MB] prepared by the KPMG member firm in Hong Kong: Budget Summary 2017-2018
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