DIPN 46 – guidelines on transfer pricing, methodologies and related issues

On 4 December 2009, the Hong Kong Inland Revenue Department (“IRD”) issued the Departmental Interpretation and Practice Notes No. 46 (“DIPN 46”), establishing the IRD’s interpretation and practices on transfer pricing methodologies and related issues.

DIPN 46 outlines a comprehensive framework on transfer pricing in Hong Kong. It also provides guidance on the basis on which the IRD will assess the arm’s-length nature of taxpayers’ related-party transactions and relevant transfer pricing or profit reallocation adjustments, if necessary, will be made.

At present, five double taxation agreements (“DTA”) have been concluded with Mainland China, Luxembourg, Thailand, Vietnam, and Belgium with provisions mandating the adoption of the arm’s-length principle for pricing transactions between associated companies. DIPN 46 illustrated the arm’s-length principle, in the context of DTAs, by adopting independent transactions as benchmarks to determine how profits and expenses should be allocated for transactions between associated enterprises and these definitions are also referenced from the Organisation for Economic Co-operation and Development (“OECD”) Model.

Apart from international related party transactions, DIPN 46 provides guidance on domestic related party transactions which taxpayers should also pay attention to. At present, DIPN 46 does not indicate whether the IRD will introduce an advance pricing arrangement.

According to DIPN 46, taxpayers are encouraged to prepare and retain documentation on transfer pricing related transactions. The Note can be applied retrospectively and IRD has the authority to enquire on filings within 7 years. Failure to commit under the Hong Kong Inland Revenue Ordinance may result in penalty being levied on any unpaid or underpaid tax up to a maximum of 300%.

In conclusion, the issue of DIPN 46 provides comprehensive guidance on transfer pricing and related issues in Hong Kong. Taxpayers should consider appropriate actions, including review and assess their historical, current and future transfer pricing arrangement.

Disclaimer:

The publication contains information in summary form and is therefore intended for general guidance only.  This publication is not intended as legal, accounting or other professional advice and should not be relied upon as such.  If legal, accounting or other professional advice or expert assistance is required, the services of a competent professional should be sought.  Neither Reanda Lau & Au Yeung Limited nor any related entity shall have any liability to any person or entity that relies on the information contained in this publication.

For more details, please refer to Hong Kong Inland Revenue Department website:
http://www.ird.gov.hk/eng/pdf/e_dipn46.pdf