Hong Kong does not have a contemporaneous documentation requirement, but the tax authorities may ask a taxpayer to submit documentation to justify its transfer pricing.
The IRD also encourages the preparation of contemporaneous transfer pricing documentation, although it is not required under law. However, taxpayers are required under law to keep records that enable the IRD to readily verify:
- The quantities and values of the goods and the identities of the sellers or buyers
- The services that result in receipts and payments.
The types of contemporaneous transfer pricing documents that taxpayers are expected to maintain include details on intercompany transactions with regard to the nature of transactions and payments made/received.
If subjected to an audit involving transfer pricing issues, the IRD would require the taxpayer to provide the following details:
- information about associated enterprises involved in controlled transactions, transactions at issue, functions performed, information derived from independent enterprises engaged in similar transactions
- information about controlled transactions, including the nature and terms, economic conditions, property involvement, product and service flows, changes in trading conditions and renegotiations of existing arrangements
- information relating to comparable companies having transactions similar to the controlled transactions
- information on associated enterprises, such as an outline of the business, structure of the organization, amount of sales and operating results from the last few years preceding the transaction and the level of the taxpayer’s transactions with foreign associated enterprises
- information on pricing, business strategies, and special circumstances; including factors which influence the setting of prices or the establishment of any pricing policies for the taxpayer and the whole multinational enterprise group like those of mark-up on cost, deducting related costs from sales prices to end-users in the market where the foreign related parties are conducting a wholesale business, or to employ an integrated pricing or cost contribution policy on a whole group basis
- information on the factors that lead to the development of such pricing policies, and, where applicable, consistency with transactional conditions in the open market
- explanation of the selection, application, and consistency with the arm’s length principle of the transfer pricing method used to establish the transfer pricing
- special circumstances concerning any set-off transactions that have an effect on determining the arm’s length price. Details of any particular management strategies or circumstances particular to the type of business that may temporarily alter pricing structures, including market entry, market share, new products, or defensive strategies
- general commercial and industry conditions
- information about functions performed taking into account assets used and risks assumed
- documents showing the process of negotiations for determining or revising prices in controlled transactions
The IRD is increasingly addressing transfer pricing as part of general tax audits and transfer pricing documentation will assist to mitigate the risk of a transfer pricing adjustment.
Ultimate parent entities established in Hong Kong may voluntarily submit Country-by-Country (CbC) reports in respect of accounting periods beginning between 1 January 2016 and 31 December 2017 via the CbC Reporting Portal. Hong Kong’s mandatory CbC reporting requirements will apply for fiscal years beginning on or after 1 January 2018, with the legislation for the implementation of the requirements currently pending approval by the Hong Kong Legislative Council.