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Transfer Pricing: Hong Kong Issues Final Regulations

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Transfer Pricing: Hong Kong Issues Final Regulations

by Grant Thornton China, 29 May 2012
topics:
Tax
tags:
advance pricing arrangement (APA) transfer pricing
In a seminar held by the Hong Kong Inland Revenue Department (hereinafter referred to as “IRD”) at the beginning of 2012, the Commissioner of Inland Revenue (hereinafter referred to as “the Commissioner”) proclaimed that it would launch an Advance Pricing Arrangement (hereinafter referred to as “APA”) program in April 2012, as well as start to accept APA applications.
 
Shortly thereafter, the IRD circulated to certain industry representatives as well as discussion groups the draft copy of “DIPN 48 - Advance Pricing Arrangements” (hereinafter referred to as “draft DIPN 48”) to solicit comments and feedback. (For details, please refer to China Transfer Pricing Alert – Issue 3, 2012).
 
After a series of discussion and consultation, IRD released the final version of “DIPN 48 - Advance Pricing Arrangements” (hereinafter referred to as “final DIPN 48”) and commenced APA program from 2 April 2012.
 
Compared with the draft DIPN 48, several terms have been amended in the final DIPN 48 and it also supplements certain definitions which were not elaborated in the draft DIPN 48. In this article, we will highlight the amendments of the final DIPN 48 and share our observations.
 
Amendments
Important changes and amendments of the final DIPN 48 can be summarized as follows:
 
Acceptance of unilateral applications. The final version defines three circumstances for which the IRD will accept the unilateral APA applications:
 
  • The Double Taxation Agreements (hereinafter referred to as “DTA”) partner(s) does/do not wish to participate in or continue the APA process
 
  • The Commissioner fails to reach an agreement with the DTA partner(s)
 
  • When a non-DTA state is prepared to give a unilateral APA regarding transactions which are integrally linked to the controlled transactions covered by bilateral or multilateral APA
 
Under the first two circumstances, a unilateral APA may be concluded with the agreement of both the enterprise and the Commissioner, while the third circumstance may result in a unilateral APA covering the linked transactions in the non-DTA state.
 
Threshold. In the draft DIPN 48, the threshold for an APA application is normally HK$100 million of covered controlled transactions for each year covered in the intended APA and will be lightened upon the attitude of the DTA partner(s). However, such a term has been significantly revised:
 
  • The threshold is HK$80 million of transactions involving sale and purchase of goods for each year covered in the APA
 
  • The threshold is HK$40 million per annum if the APA application is connected with services
 
  • The threshold of an APA application that is related with the use of intangible properties is HK$20 million per annum
 
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