Hong Kong Inland Revenue Department --- Transfer Pricing

On 13 July 2018, the Government of Hong Kong Special Administrative Region gazetted Inland Revenue (Amendment) (No. 6) Ordinance 2018 (“the Amendment Bill”) which codified and set out certain transfer pricing principles into the Inland Revenue Ordinance (Cap. 112) (“the IRO”). IRD has been adopting some transfer pricing concepts in case review, field audit and investigation cases.

1. Intra-group management fees
Concern is whether there is any overpayment by the taxpayer for the services received between related entities and whether the taxpayer has been sufficiently remunerated for the services performed.
2. Intercompany purchase and sale
Concern is whether sufficient margin has been made in the taxpayer’s part to remunerate the functions and activities performed throughout the entire value chain.
3. Intercompany service charge
Concern is whether there were actual services provided and whether there is any overpayment for the services received or under remuneration for services provided.

According to the Hong Kong tax legislation, the burden of proof rests with the taxpayer. A proper safeguard includes a transfer pricing documentation with a local fact finding and robust functional analysis detailing the functions performed, assets used and risks assumed by Hong Kong entities.
Heavy penalties would be imposed where a tax return was made with incorrect information on transfer pricing without a reasonable cause or with the intent to evade tax. Taxpayers will be liable to an administrative penalty by means of additional tax not exceeding the amount of tax undercharged (maximum imposed is 3 times the tax undercharged, as currently imposed for incorrect return and other matters under section 82A of the IRO)