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Hong Kong's Inland Revenue Department (IRD) issued 52 pages of detailed guidance December 4, setting out its views on the application of transfer pricing in Hong Kong in Departmental Interpretation and Practice Note No. 46-Transfer Pricing Guidelines, Methodologies and Related Issues (DIPN 46). 1 This outlines the definition and application of the arm's-length principle making it clear that Hong Kong now formally endorses it. It also:
* Approves and discusses the application of the comparable uncontrolled price method, the resale price method, the cost plus method, the profit split method, and the transactional net margin method;
* Makes clear that transfer pricing documentation is encouraged in Hong Kong but also notes that it is not obligatory;
* Outlines the IRD's approach to the attribution of profits to permanent establishments, recognising the "functionally separate entity" adopted by the Organization for Economic Cooperation and Development;
* Includes three pages of detail on the IRD's view on transfer pricing-related tax schemes and tax avoidance; and
* Notes that IRD's approach generally will be consistent with the OECD transfer pricing guidelines. At the same time, the IRD notes that it is not necessarily bound by the OECD's approach.
The remainder of this article focuses on answering questions that have arisen since publication of DIPN 46.
Does the publication of DIPN 46 matter?
The publication of DIPN 46 matters because it demonstrates that transfer pricing is on the radar screen of the tax authorities in Hong Kong. This is clearly important. Some taxpayers may have been relatively complacent about transfer pricing in Hong Kong in the past having either believed that the existing legislation did not allow the IRD to investigate transfer pricing matters or believing that the likelihood of a transfer pricing related audit was low. The impact of DIPN 46 will be most significant for taxpayers that have not previously reviewed their transfer pricing arrangements from a Hong Kong perspective.
What periods does DIPN 46 apply to?
DIPN 46...