Transfer pricing law has come to Hong Kong

In order to adopt the OECD'S recommended transfer pricing framework for implementing Base Erosion and Profit Shifting Action Plans and to significantly empower the Hong Kong tax authority to combat transfer pricing avoidance, Hong Kong passed the long awaited relevant tax law in July 2018.

In following the Base Erosion and Profit Shifting (“BEPS”) and Transfer Pricing (“TP”) action initiatives taken by the OECD, on 4 July 2018, Hong Kong passed the BEPS and TP law (to be enacted as Inland Revenue (Amendment) (No. 6) Ordinance 2018). It will come into force after being published in the Gazette.

Being the first piece of tax law specifically tackling TP issues in Hong Kong, the BEPS and TP law stipulates for arm’s length principle and the Hong Kong tax authority is authorized to make TP adjustments on non-arm’s length transactions between associated parties that result in potential Hong Kong tax advantages.

Subject to certain exemption threshold requirements, the new law also formulates a three-tiered TP documentation requirements (comprising of Master File, Local File, Country-by-Country report) into the Hong Kong tax law.

The BEPS and TP law (with more than 160 pages) is a complicated piece of legislation. It is expected that further guidance will be issued the Hong Kong tax authority. Companies should monitor the developments closely in this regard.