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The Hong Kong Inland Revenue Department (HKIRD) has issued the Departmental Interpretation and Practice Note No. 46 (DIPN 46) "Transfer Pricing Guidelines - Methodologies and Related Issues", which provides clarification for taxpayers with operations in Hong Kong with respect to their transfer pricing.

Transfer pricing, which refers to the price assigned to products, assets, services, funds and so forth thatare transferred between related group companies, is an issue that has risen to the top of tax authority target lists.

According to professional services network, Ernst & Young, the guidelines issued by the HKIRD will bring a welcome degree of clarity to Hong Kong taxpayers and companies.

Ernst & Young explains that the guidance issued via DIPN 46 implies that the HKIRD will apply OECD principles to transfer pricing activities of multinational taxpayers in Hong Kong, which is consistent with many of the territory's key trading partners, and will therefore allow taxpayers to design and implement policies that are compatible with their overseas affiliates.

The DIPN also indicates that the HKIRD will continue to take an interest in the pricing of related party transactions.

"DIPN 46 will be welcomed by taxpayers with operations in Hong Kong as it provides increased clarity around key transfer pricing issues, which will enable better planning and policy development," says Patrick Chueng, Ernst & Young's South China Transfer Pricing Leader.

Cheung advises taxpayers to remain vigilant with respect to intercompany transactions and payments made to related parties, as it is likely the IRD will take an aggressive approach to companies that they see abusing the arm's length principle.

"Inappropriate use of this principle is likely to attract attention of the HKIRD," says Chueng. "In addition, companies need to be mindful that because Hong Kong currently does not have a robust Double Tax Agreement (DTA) or Advance Pricing Arrangement (APA) network, adjustments made by the HKIRD to most transfer pricing cases will not be matched in the other jurisdictions and as such will result in double taxation."

Ernst & Young says that while the new guidance does not stipulate that contemporaneous documentation should be mandatory, OECD type documentation will be expected in the case of an audit and thus taxpayers are encouraged to engage in its preparation.

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