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13.4.4. APAs and Dispute Resolution Mechanisms

Transfer Pricing Adjustment Audit

There are no specific provisions given for the transfer pricing audits apart from general audit procedures in Hong Kong (Covered in Sec. 14).

Companies should keep in mind that the statute of limitation for tax audits is 6 years for normal cases and 10 years for cases of willful evasion and fraud. Therefore it is important for companies to keep good records to support the arm’s-length nature of their related party transactions. Furthermore, to determine the accuracy of a tax return, the IRD may require any taxpayer to provide sufficient records that would allow the IRD to obtain full information in respect of the taxpayer’s income. Such records are required to be maintained for a period of not less than seven years.

Transfer Pricing Cases with Residents in DTA Jurisdictions

For adjustments as a result of transfer pricing cases made in jurisdictions with which Hong Kong has a double tax agreement, the IRD will consider allowing the taxpayer to make a corresponding adjustment in Hong Kong. The IRD will only consider the adjustment if the adjustment made in the other jurisdiction is deemed to be reasonable.

In addition, for transfer pricing within DTA context, the IRD has stated that no threshold has been prescribed to define an associated enterprises, and takes a broad definition of associated enterprises when assessing related part transactions

APAs

An APA program was introduced by the IRD in March 2012. Under the program, APAs are limited to bilateral or multilateral agreements under the DTA framework and generally not to unilateral agreements. However, unilateral agreements may be considered if a treaty partner does not wish to participate in an APA, where the Hong Kong competent authority is unable to reach an agreement with the relevant treaty partner, or where a non-treaty partner is prepared to give a unilateral APA regarding transactions integrally linked to transactions covered by a bilateral or multilateral APA.

The Hong Kong APA process includes 5 phases:

  • Pre-filing,
  • Formal application,
  • Analysis and evaluation,
  • Negotiation and agreement
  • Drafting, execution and monitoring
  • The expected timeframe for concluding an APA is 18 months from the acceptance of the formal application.

The APA program is open to all residents and non-residents with a permanent establishment in Hong Kong, which are subject to profits tax, have related party transactions pertinent to Hong Kong, and meet certain controlled transaction thresholds:

  • HKD 80 million per year for sale and purchase of goods
  • HKD 40 million per year for services
  • HKD 20 million per year of intangible properties

In some cases, the IRD may relax the eligibility criteria to allow an enterprise access to the APA process.

In general, an APA will apply for 3 to 5 years.

Renewals and Extensions

APAs can be renewed with consent of all parties including the relevant DTA partner. The same process is followed as the initial APA request and any renewal request should be made at least 6 months prior to expiration of an existing APA.

An APA may also be extended for a 3 to 5 year period, subject to agreement of DTA partner. Extensions will only be granted if the terms of the existing DTA have been complied with and there are no material changes, as well as other conditions.