New Transfer Pricing Regime to Regulate Documentation
January, 30th 2018
On December 29, 2017, the Inland Revenue (Amendment) (No. 6) Bill 2017 (BEPS bill) was gazetted in Hong Kong. The BEPS bill introduces a transfer pricing regulatory regime and mandatory transfer pricing documentation requirement in Hong Kong as well as a variety of other anti-BEPS changes.
The BEPS bill marks a significant step up in Hong Kong’s transfer pricing enforcement regime and was formally introduced into the Legislative Council on January 10, 2018. The BEPS bill is a lengthy document and as such it is expected to take a few months before it can be enacted.
On the basis of the arm’s length principle, the BEPS bill proposes fundamental transfer pricing rules that further empower the Inland Revenue Department (IRD). This includes the ability to adjust the profits or losses of an enterprise where the actual provision made or imposed between two associated persons departs from the provision that would have been made between independent persons and has created a tax advantage.
The BEPS bill further introduces mandatory documentation requirements based on the three-tiered approach of Country-by-Country (CbC) Reporting, Master File, and Local File. The BEPS bill also provides further details into the Advance Pricing Arrangement (APA) programme and other related provisions.
In addition, the 2017 version of the Organization for Economic Cooperation and Development’s (OECD) transfer pricing guidelines is cited in the BEPS bill as the version to follow along with the OECD Model Tax Convention on Income and on Capital.
The BEPs bill introduces a more comprehensive transfer pricing regime to Hong Kong. Businesses with a presence in Hong Kong should review the new developments to ensure compliance with the new rules, which are more expansive than anticipated.