Transfer pricing has grown to be one of the most prominent tax issues in the international arena, receiving priority attention from national governments as well as posing increasingly significant impacts on the operations of multinational enterprises. It focuses on the prices charged in related party transactions, including the internal transfer of tangible goods, intangible property, services, loan financing and leases, and affects every aspect of cross-border operations, and corporations’ worldwide tax burden.
The legislation to (1) introduce the statutory transfer pricing regime, and (2) implement the various minimum standards under the OECD’s Base Erosion and Profit Shifting (“BEPS”) Action Plans, Inland Revenue (Amendment) (No.6) Ordinance 2018 ( the “Bill”) was passed by the Legislative Council on 4 July 2018. Please refer to our February and March 2018 Hong Kong Tax News on the background leading to the then draft legislation (the “Draft Bill”).
Hong Kong has always been relying on a few provisions in its tax laws and a Departmental Interpretation Practice Note (“DIPN”) to combat tax avoidance through transfer pricing. Subsequent to joining the Organisation for Economic Co-operation and Development (“OECD”)’s inclusive framework for Base Erosion and Profit Shifting (“BEPS”) in June 2016 to counter BEPS, and publishing the outcome of the consultation exercise in July 2017, a draft bill mainly to implement key actions arising from the BEPS agenda was gazetted (Inland Revenue (Amendment) (No. 6) Bill 2017) (“Amendment Bill”) on 29 December 2017. It is expected to be passed before the summer of 2018.
On 31 July 2017, the Government released the consultation report on measures to counter base erosion and profit shifting (“BEPS”) (“the Report”) following its consultation exercise towards the end of 2016. The Report indicates that the proposals in relation to transfer pricing (“TP”), country-by-country (“CbC”) reporting and dispute resolution would be introduced as laws by the end of 2017 with effect to the 2018 taxation year. Corporations would need to prepare for these changes very quickly.
On 17 March 2017, the State Administration of Taxation (“SAT”) released its long-awaited Bulletin on Special Tax Investigations, Adjustments and Mutual Agreement Procedures (“Bulletin 6”), thus largely completing the revision of the transfer pricing specific clauses of the old Circular 2 concerning Special Tax Adjustments.
July 2016 - SAT Issued new rules on reporting of related party transactions and contemporaneous documentation
On 29 June 2016, the State Administration of Taxation (SAT) issued the Public Notice Regarding Refining the Reporting of Related Party Transactions and Administration of Transfer Pricing Documentation (SAT Public Notice  No. 42, hereinafter referred to as “Bulletin 42”). Bulletin 42 provides new transfer pricing compliance requirements in China, including Annual Reporting Forms for Related Party Transaction (“RPT Forms”), Country- by-Country Reporting (“CbCR”), and Transfer Pricing Documentation (“TPD”).
As a member of the G20, China has expressed its strong support to Base Erosion and Profit Shifting (“BEPS”) Action Plans being studied by the OECD, the final report of which was issued on 5 October 2015, and has been deeply involved in the BEPS development process. It has been expected that the BEPS project would have a significant influence on the work of China’s State Administration of Taxation (“SAT”) in particular the issuance of comprehensive transfer pricing (“TP”) rules to replace the existing Guo Shui Fa  No. 2 (“Circular 2”).