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Facing more scrutiny than ever, multinational companies are devoting a growing amount of resources to transfer pricing (TP) policy in a bid to avoid damaging court cases
Ireland’s transfer pricing regime looks set to significantly change from 1 January 2020, nine years after its introduction. The Irish Government has outlined several areas for potential change, the full details of which will become clear when the country’s 2019 Finance Bill is published this November.
Hong Kong implements transfer pricing regulatory regime
The Hong Kong Inland Revenue Department ("IRD") has recently issued following Departmental Interpretation and Practice Notes ("DIPN") on 19 July 2019 (see links below) setting out its interpretation and guidance on the relevant TP rules and requirements as well as the latest international standards relating to transfer pricing:
- DIPN 58 – Transfer Pricing Documentation and Country-by-Country Reports focusing on the three-tiered TP documentation requirements.
- DIPN 59 – Transfer Pricing between Associated Persons focusing on the applicability and interpretation on TP Rule 1 which requires transactions between associated persons to be computed on an arm’s length basis.
- DIPN 60 – Attribution of Profits to Permanent Establishments in Hong Kong providing clarity on the definition of PE and detailed guidance on the application of TP Rule 2 and the documentary support requirements.
Hong Kong adopts a territorial source principle of taxation, profits derived from a source outside Hong Kong are not taxable in Hong Kong. However, DIPN59 states that Rule 1 requires the computation of profits from transactions between associated persons on an arm’s length basis for tax purposes before territorial source principle is applied to determine the chargeability of income or profit to Hong Kong profits tax.
Thus, Hong Kong companies with offshore profits claim should also be subject to Rule 1 on their transactions with associated persons.
The OECD’s three-tiered standardized approach
The IRD follows the OECD’s three-tiered standardized approach for transfer pricing documentation, includes Country-by-Country (“CbC”) report, Master file and Local file. Various exemption thresholds are provided for preparing Master file and Local file.
Even if a Hong Kong company meets the exemption thresholds and is not required to prepare Master File and Local File for the relevant accounting year, the company is still required to comply with the TP Rule 1. The IRD emphasises that proper transfer pricing documentation can serve as a defence for transfer pricing treatment and having a comprehensive TP documentation can mitigate penalty exposure in tax or TP examination/audits.
In relation to CbC reporting, since the Multilateral Convention is entered into force in Hong Kong on 1 September 2018, bilateral arrangements for exchange of CbC Reports need to be made with jurisdictions having Comprehensive Avoidance of Double Taxation Agreements/Arrangement (CDTAs) with Hong Kong. So far, Hong Kong has made such bilateral arrangements with the following 17 jurisdictions: Austria, Canada, France, Guernsey, Ireland, Italy, Japan, Jersey, Korea, Latvia, Malta, Mexico, Netherlands, New Zealand, Portugal, South Africa, United Kingdom. Exchange relationship for the year ended 31 December 2018 between Hong Kong and other jurisdictions having CDTAs (other than the above mentioned 17 jurisdictions) (in particular China) has not been activated as of 16 September 2019. Thus, local filing of CbC report is required in Hong Kong within 12 months after the end of the accounting period.
A CbC Report must be made in the form of an XML document. The IRD has developed a data schema in XML which is based on the CbC XML Schema v1.0.1 issued by the OECD. The data schema specifies the data structure and format for filing CbC Report to the IRD. For details, please refer to https://www.ird.gov.hk/eng/tax/dta_cbc.htm.
Kindly note that the IRD has not adopted the OECD’s XML schema standardized electronic format and the data schema in XML developed by the IRD is not in accordance with the OECD’s XML schema. Thus, the CbC Report in XML format that is prepared by the UPE for submission to their local Tax Authority may not be applicable for Hong Kong CbC report filing purpose. In addition, additional information might be needed by the IRD in preparing and filing the CbC Report.
CbC Reporting Notification
Further, every Hong Kong Entity (including Hong Kong Branches/Permanent Establishments of foreign companies) of a Reportable Group (a multinational enterprise group with prior year annual consolidated group revenue of HK$6.8 billion (approximately EUR750 million) or above) is required to file a CbC Reporting Notification containing information relevant for determining the obligation for filing a CbC Return within 3 months after the end of the relevant accounting period.
For a Reportable Group with more than one Hong Kong Entity, one of the Hong Kong Entities of the Reportable Group can be nominated to file a CbC Reporting Notification for all Hong Kong Entities of the Reportable Group. A CbC Reporting Notification must be filed with the IRD electronically via the Portal within 3 months after the accounting year-end date of the Reportable Group.
Contact our tax team to find out more.