Transfer pricing regulatory regime in Hong Kong

Transfer pricing regulatory regime mandates Hong Kong entities to prepare transfer pricing documentation, namely master file, local file and country-by-country report, requires a Hong Kong entity to articulate and execute a consistent transfer pricing policy and provide the Assessor with useful information for assessing transfer pricing risks.
Transfer pricing documentation requires a summary of the global supply chain and the identification of the value drivers. It is important to document how value is generated by the group as a whole, the interdependencies of the functions performed by the associated enterprises with the rest of the group, and the contributions that the associated enterprises make to that value creation.
It helps demonstrate that the enterprise has made reasonable efforts to determine the arm’s length amount under section 50AAF(1) or 50AAK(2) of the Inland Revenue Ordinance (Cap. 112) (“the IRO”).
The requirements relating to master file and local file apply in relation to an accounting period beginning on or after 1 April 2018.

The requirement to prepare a master file and a local file is subject to the following exemptions:

1. Exemption based on size of business
A Hong Kong entity which satisfies any two of the conditions below will not be required to prepare a master file and a local file for an accounting period:
o the total amount of the entity’s revenue for the relevant accounting period does not exceed $400 million;
o the total value of the entity’s assets at the end of the relevant accounting period does not exceed $300 million; and
o the average number of the entity’s employees during the relevant accounting period does not exceed 100.

2. Exemption based on amount of controlled transactions
If the total amount of a type of controlled transactions undertaken by a Hong Kong entity for an accounting period does not exceed the following prescribed threshold, the local file of the entity in respect of the accounting period will not be required to cover that particular type of transactions:

Type of transactions Amount
Transfers of properties $220 million
Transactions in respect of financial assets $110 million
Transfers of intangibles $110 million
Other transactions $44 million

Where the desk-based review indicates that the Hong Kong entity has failed to prepare a master file and a local file in accordance with the requirements set out in section 58C, the Assessor may institute prosecution against the entity under section 80(2Q) of the IRO. Upon conviction, the Hong Kong entity is liable to a fine at level 5 (i.e. $50,000), and the court may order the entity to do the act which it has failed to do within a specified time under section 80(2R) of the IRO. If the Hong Kong entity fails to comply with the court order, it would be liable to a further fine at level 6 (i.e. $100,000) on conviction under section 80(2S) of the IRO.

Source from: (on 25 Dec 2019)