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Transfer Pricing Documentation Requirements In Hong Kong

The Inland Revenue (Amendment) (No. 6) Bill 2017 (the “Amendment Bill”) has passed. Most of the provisions within the Amendment Bill will have retrospective effect from the year of assessment 2018/19.

The main objectives of the Amendment Bill are to codify the transfer pricing (“TP”) 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”).

TP Principles
The TP 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.

TP Documentation Requirements
Hong Kong entities shall be required to prepare Master File, Local File and Country-by-Country (“CbC”) report.

Master File and Local File
There are two types of exemptions to entities that engage in transactions with associated enterprises from preparing Master File and Local File:

(i) Exemption threshold – Size of Business:
A Hong Kong entity meeting any two of the below 3 exemption thresholds for an accounting period is exempted from preparing the Master File and Local File for that accounting period:

1. Total annual revenue less than HK$400 million
2. Total asset value less than HK$300 million
3. Average number of employee less than 100

(ii) Exemption threshold – Volume of related party transactions
Certain qualifying domestic transactions can be excluded from the threshold and do not need to be documented in the Local File. If the particular type of related party transactions for an accounting period less than the exemption threshold, the Hong Kong entity is not required to prepare a Local File for that type of transactions for that accounting period.

The following thresholds, per accounting period, apply for each type of related party transactions for exemption purpose:

1. Transfers of assets (excluding financial or intangible assets) less than HK$220 million
2. Transfers of financial assets less than HK$110 million
3. Transfers of intangible assets less than HK$110 million
4. Any other transactions less than 44 million

If the entity does not need to prepare a Local File for all of the above specified types of related party transactions, it is not required to prepare the Master File.

Unless exemption applied, the entity is required to prepare Master File and Local File for an accounting period within 9 months after the end of that accounting period.

Master File and Local File are required for accounting periods beginning on or after 1 April 2018. For entities with a 31 December year-end date, the first application is for the accounting year ending on 31 December 2019, with the completion of the files by 30 September 2020.

CbC report
Groups whose annual consolidated revenue more than HKD 6.8 billion will be required to file Country by Country Reports for accounting periods beginning on or after 1 January 2018.


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