Transfer Pricing Documentation Compliance in Hong Kong
Introduction
Under the Transfer Pricing (“TP”) regime in Hong Kong, Hong Kong entities are obligated to prepare TP documentations, i.e. Master File, Local File and Country-by-Country Report in certain circumstances.
The above three-tiered system requires a Hong Kong entity to formulate and implement a TP policy in accordance with the TP requirements, as well as to provide the Hong Kong Inland Revenue Department (“IRD”) with relevant information for assessing TP risks.
Threshold Requirements for Preparing Master File and Local File
A Hong Kong entity is required to prepare a Master File and a Local File if the following exemption criteria cannot be fulfilled:
- Exemption based on the amount of related party transactions
Type of transactions
Amount does not exceed
Transfers of properties (whether movable or immovable but excluding financial assets and intangibles)
HKD220 million
Transactions in respect of financial assets
HKD110 million
Transfers of intangibles
HKD110 million
Other transactions
HKD44 million
Points to note:
• The threshold for each type of related party transaction applies to the aggregate amount of the same type of transaction.
• A related party transaction can either be a revenue item or an expense item.
• Each transaction should be considered separately (i.e. offsetting is not allowed).
• It is the arm’s length amount of the transaction which should be aggregated to determine whether the threshold is exceeded.
If the total amount of any type of related party transactions of the Hong Kong entity exceeds the above threshold, the Hong Kong entity will need to prepare a Master File and a Local File.
- Exemption based on business size
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:
• The total amount of the entity's revenue for the relevant accounting period does not exceed HKD400 million;
• The total value of the entity's assets at the end of the relevant accounting period does not exceed HKD300 million; and
• The average number of the entity's employees during the relevant accounting period does not exceed 100.
- Commencement period for preparing Master File and Local File
The requirements relating to Master File and Local File apply in relation to an accounting period beginning on or after 1 April 2018.
End-date of annual accounts
End-date of the first accounting period for Master File and Local File
Between 1 January and 30 March (i.e. M code)
Between 1 January 2020 and 30 March 2020 (i.e. year of assessment 2019/2020)
31 March (i.e. M code)
31 March 2019 (i.e. year of assessment 2018/2019)
Between 1 April and 30 November (i.e. N code)
Between 1 April 2019 and 30 November 2019 (i.e. year of assessment 2019/2020)
Between 1 December and 31 December (i.e. D code)
Between 1 December 2019 and 31 December 2019 (i.e. year of assessment 2019/2020)
- Timing for preparing Master File and Local File
Under Section 58C(2)(a) of the Inland Revenue Ordinance (“IRO”), a Hong Kong entity must prepare a Master File and a Local File no later than 9 months after the end of its accounting period.
In addition, the Hong Kong entity has to declare in the Profits Tax Return and supplementary form S2 whether a Master File and a Local File have to be prepared.
The Master File and Local File must be prepared in English or Chinese.
A Hong Kong entity must retain the files for a period of not less than 7 years after the end of the accounting period concerned.
- Regular reviews of Master File and Local File conducted by the IRD
The IRD will conduct regular reviews to ensure compliance of the preparation of Master File and Local File by Hong Kong entities in the following manners:
• The regular reviews would normally be carried out within 6 months after the filing of Profits Tax Returns.
• The selected entity would receive an enquiry letter from the IRD, under which it is required to complete and submit the form “Transfer Pricing Documentation – Master File and Local File” (Form IR1475).
| Read more |
