The Inland Revenue (Amendment) (No. 6) Bill 2017 (Amendment Bill)

The Inland Revenue (Amendment) (No. 6) Bill 2017 (Amendment Bill)

The main objectives of the Amendment Bill are to codify the transfer pricing principles into the Inland Revenue Ordinance (Cap. 112) (“IRO”) and implement the minimum standards of the Base Erosion and Profit Shifting (“BEPS”) package promulgated by the Organization for Economic Co-operation and Development (“OECD”).

To codify transfer pricing principles into the IRO is a very important legislative motion. Transfer pricing means the pricing policy of the transactions of transferring of goods, service and intangible assets between related parties.  The proposed transfer pricing principles clearly state that if the pricing policy of the actual transaction between two related parties is different from the pricing policy for the transaction with a third party and such difference would enable the related entities to enjoy tax benefit, then the respective profit or loss arising from the related party transactions would be adjusted.  According to the new provisions of OECD to buffet BEPS, the Government of HKSAR suggested to include the international principles of transfer pricing into the IRO, to ensure the related party transactions in Hong Kong to comply with the independent transaction principles for tax reporting purpose.  In addition, the Government also suggested to introduce penalty provisions to ensure the entities to comply with the respective pricing principles.

In addition, the Amendment Bill would also implement the minimum standard for BEPS, including country-by-country (“CbC”) reporting and the mechanism for solving disputes.  The requirements for filing a CbC Return, which includes a CbC Report, only apply to a multinational enterprise (“MNE”) Group whose annual consolidated group revenue reaches the specified threshold amount, i.e. HK$6.8 billion (“Reportable Group”).

In respect of a Reportable Group, the primary obligation of filing a CbC Return is on the ultimate parent entity (“UPE”) resident in Hong Kong (“HK UPE”). The HK UPE is required to file a CbC Return for each accounting period beginning on or after 1 January 2018. The HK UPE may also voluntarily file a CbC Return for an accounting period beginning between 1 January 2016 and 31 December 2017.