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Comment and analysis

Hong Kong

Transfer pricing “arrives” in Hong Kong

On 4 December 2009, Hong Kong Inland Revenue Department (“IRD”) issued the much awaited Departmental Interpretation and Practice Note No. 46 - Transfer Pricing Guidelines, Methodologies and Related Issues (“DIPN 46”). DIPN 46 seeks to provide taxpayers with greater clarity on the IRD’s viewpoint regarding the legal basis of transfer pricing (“TP”) and the application of TP principles and methodologies in Hong Kong.

What does it cover?

DIPN 46 contains detailed guidance setting out the IRD’s viewpoint on a number of areas, including:

  • the legislative basis of TP in Hong Kong including details of possible retrospective application on domestic and cross-border transactions;

  • definition and application of the arm’s length principle;

  • confirmation of acceptable TP methods;

  • documentation requirements with reference to the OECD Guidelines;

  • elimination of double taxation resulting from TP adjustments;

  • attribution of profits to permanent establishments (“PEs”) including recognition of the ‘functionally separate entity’ approach to attributing profits to a PE; and

  • tax schemes and tax avoidance in relation to TP with a potential penalty of up to 300% of tax underpaid.

Implications for the Financial Services Industry

In relation to the financial services sector, we consider the following three areas may be of specific interest to the IRD in light of the release of DIPN 46.

Intra-group services

Multinationals often have a regional head office in Hong Kong providing support services to group entities within the Asia Pacific region. Occasionally, for regulatory and/or commercial reasons, costs relating to these services are borne by the head office in Hong Kong and not passed on to the recipient group entities.

Where a deduction may have been obtained in the past, DIPN46 contains a section on allocation of service

costs which may now result in the IRD imputing and imposing tax on a service fee or restricting a deduction in such circumstances.


Many subsidiaries and branches of multinational groups are group funded through a mixture of long-term loans and short-term facilities. For TP, the taxpayer must demonstrate that the interest rate is charged on an arm’s length basis and that the quantum of debt is not excessive.

The issuance of DIPN 46 has brought the issue of related party interest free loans into focus once again. Where the lending party has interest costs of its own, the TP risks are likely to increase following the issuance of DIPN 46 and existing positions should be carefully considered by taxpayers.

Investment advisory / management services

Many multinational investment management and financial services groups have subsidiaries in Hong Kong which are engaged to identify potential

PricewaterhouseCoopers • A publication for financial services industry tax and transfer pricing professionals • February 2010


investment opportunities and provide research advice to the overseas related parties.

From a TP perspective, the challenge for a taxpayer is to be able to select and document the application of an appropriate TP method which incorporates such services whilst keeping in mind the substantive basis of the operation in Hong Kong.

DIPN 46 confirms that the IRD would apply the principles in the OECD Guidelines, except where they are incompatible with the express provisions of the Inland Revenue Ordinance.


DIPN 46 signals that TP has “arrived” in Hong Kong. Tax risk is therefore clearly present, and in our view this risk needs assessing, managing and mitigating where appropriate.

For more information please contact:

Shyamala Vyravipillai - shyamala.vyravipillai@hk.pwc.com


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