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Transfer Pricing in Hong Kong

Transfer pricing alludes to the costs charged between a Hong Kong company and its connected substances in moving goods, administrations, and immaterial property.

Hong Kong transfer pricing enactment is a striking commitment to counter tax-evasion of cross-line transactions, particularly to the individuals who are portions of a multinational company group.

How Was Transfer Pricing Enactment Created in Hong Kong?

One must-know term in Transfer Pricing (TP) enactment is the arm’s length principle. This standard guideline is illuminated in most current Double Tax Agreements (DTA) of Hong Kong.

On 13 July 2018, the Inland Revenue No. 6 Ordinance 2018 declared Hong Kong’s new transfer pricing model.

On 19 July 2019, the IRD delivered a progression of Departmental Interpretation and Practice Notes (DIPNs) as the followings:

  • DIPN 58: Transfer pricing filings and Country-By-Country reports
  • DIPN 59: Application of transfer pricing between related substances
  • DIPN 60: Profit portion to perpetual foundations in Hong Kong

The arm’s length standard obliges any income or loss arising from at least one transaction corresponding to a Hong Kong enterprise’s associated persons to be determined on the arm’s length basis.

Simply put, the cost and expenses in a controlled transaction charged by your Hong Kong company’s connected entities should be the same as the sum that would have been paid by independent companies.

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Master File and Local File

Pursuant to the transfer pricing system, it is needed for Hong Kong taxpayers of a gathering that surpass the prescribed thresholds to set up the transfer pricing documentation when occupied with transactions with its associated entities. The transfer pricing documentation covers three fundamental papers: master file and local file, plus Country-by-Country report.

A master file should give a significant level outline of enterprises’ gathering, including worldwide business operations and transfer pricing policies. It is required to assist in assessing the presence of significant transfer pricing risk. The data in the master file is coordinated into five categories:

  • the gathering’s hierarchical structure;
  • the gathering’s business or businesses;
  • the gathering’s intangibles;
  • the gathering’s intercompany financial activities; and
  • the gathering’s financial and tax positions.

A local file should give definite transactional transfer pricing data specific to the enterprise in every jurisdiction, including details of material controlled transactions attempted by the enterprise and associated enterprises included, amounts engaged with those transactions and transfer pricing analysis with respect to those transactions. It supplements the master document and helps meet the goal of assuring that the enterprise has agreed with the arm’s length standard in its material transfer pricing positions.

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Entities Required to Prepare Master File and Local File

A Hong Kong element of a gathering in the all-inclusive sense taking part in transactions with associated entities is needed to set up a master file and a local file, subject to some exemptions.

Gathering in the all-inclusive sense means:

  • a gathering in the usual sense; or
  • a single enterprise on the off chance that it is resident for tax purposes in a single jurisdiction and is subject to tax in another jurisdiction concerning the business helped out through a lasting establishment in that other jurisdiction.

Gathering in the usual sense means an assortment of enterprises related through ownership or control such that:

  • it is needed to plan consolidated financial statements for financial revealing purposes under material accounting principles; or
  • it would be required if equity interests in any of the enterprises were traded on a public securities exchange.

A Hong Kong element means any separate business unit of the gathering that is resident for tax purposes in Hong Kong or a perpetual establishment in Hong Kong.

Information to Be Incorporated in Master File and Local File

Prescribed data to be remembered for a master file and a local file has been set out in Part 3 of the Schedule 17I to the IRO. For more details, please click here.

Period to Prepare and Submit Master File and Local File

Under section 58C(2)(a) of IRO, a Hong Kong element must set up a master file and a local file not after 9 months after the finish of its accounting period. The Hong Kong substance has to proclaim in the profits tax return and S2 supplementary structure whether a master and a local file must be readied. The master file as well as the local file must be prepared for submission upon request by the Assessor. Here’s more on: A Guide to Hong Kong Offshore Banking

Compliance

While the Assessor won’t need Hong Kong entities to furnish their master files and local files after documenting profits tax returns, the entities need to announce in their profits tax returns and supplementary forms S2 whether they have managed controlled transactions with associated entities and are needed to set up a master file and a local file under section 58C. The Assessor will lead customary desk-based reviews to ensure compliance. These reviews’ fundamental target is to ensure that Hong Kong entities have kept the appropriate master file and local file for their controlled transactions with concerned entities.

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