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Key Summaries of amended IRO for BEPS ( The Inland Revenue (Amendment) (No. 6) Ordinance 2018) - Gazette on 13 July 2018

The Inland Revenue (Amendment) (No. 6) Ordinance 2018, which primarily implements the minimum standards of the Base Erosion and Profit Shifting (“BEPS”) package promulgated by the Organisation for Economic Co-operation and Development (“OECD”) and codifies the transfer pricing principles into the Inland Revenue Ordinance (Cap. 112) (“IRO”), was gazetted on 13 July 2018

 

Transfer Pricing Documentation

According to BEPS action 13, Hong Kong will adopt the three-tier documentation framework in BEPS action 13:

  1. Master File (“MF”);

  2. Local File (“LF”); and

  3. Country-by-Country Report ( “CbC report”)

 

The threshold of exemption of preparing the Master File and Local File:

 

  A) Exemption based on size of busines

  B) Exemption based value of related party transactions (“RPT”)

<Note 1>
“Specific domestic transactions” are disregarded when computing the amount of the above four categories of related party transactions, and do not need to be documented in the Local File.

 

There are three criteria of “Specific domestic transactions”:

  • The transaction meets the domestic nature test – the payer and payee of the transactions are both Hong Kong tax resident;

  • There is no actual tax difference arising as a result of the arrangement, meaning that (i) each person's income/loss is chargeable/allowable for Hong Kong tax purposes, and no tax concession or exemption applies to any income (loss); or (ii) the “non-business loan test” is met, under which the lending of money otherwise than in the ordinary course of a money lender or intra-group financing business; and

  • The transaction is not designed to utilize any tax loss for tax avoidance purposes.

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C) Other matters of Master File and Local File

  • A taxpayer must prepare both MF and LF within 9 months after their respective year-ends if it exceeds these thresholds. MF and LF must be submitted only upon a request by the IRD.

 

  • The penalties will be charge to taxpayers of HK$50,000 for the failure to comply with MF and LF requirement, and up to HK$100,000 for the failure to comply upon court’s order

 

  • According to the Exchange of Information arrangement with OECD, IRD may provided its gathered information to other tax authorities

 

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D) Country by Country Reporting

Hong Kong resident ultimate parent companies of multinational enterprise are required to report and submit CbC report to IRD when:

  • The consolidation revenue > HK$6.8 billion in previous year; or

  • Hong Kong entities that are nominated as surrogate filling entities.

 

The penalties will be charge to taxpayers of HK$50,000 for the failure to comply with CbC Report requirement, and up to HK$100,000 for the failure to comply upon court’s order, and plus a daily fine of HK$500.

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E) The key elements and effective date of the Inland Revenue (Amendment) (No. 6) Ordinance 2018 are summarized as follows

The Fundamental Transfer pricing rule

According to s50AAF “Rule 1: Arm’s length principle for provision between associated persons” (“TP Rule 1”), transfer pricing adjustments of related parties transactions are required on the tax return where:

  • The actual provision differs from the provision that would have been made or imposed as between independent persons (arm’s length provision); and

  • The actual provision confers a potential advantage in relation to Hong Kong tax on an affected person (advantaged person).

 

S50 AAJ “Interpretation: potential advantage in relation to tax” represented the potential exemption from TP Rule 1 in the following conditions:

 

For the purpose of HK tax or foreign tax, the actual provision does not have either or both of the following effects (s50AAJ(1)):

  • a smaller amount would be taken as the person’s income; or

  • a larger amount would be taken as the person’s loss.

 

OR

 

The following three criteria are met(s50AAJ(2)-(7)):

  • Domestic nature condition;

  • No actual tax difference condition or Non-business loan condition; and

  • Actual provision not having a tax avoidance purpose.

 

 

 

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Reference link:

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Inland Revenue (Amendment) (No. 6) Ordinance 2018

https://www.ird.gov.hk/eng/pdf/2018/ira_no6b_e.pdf

 

Inland Revenue (Amendment) (No. 6) Ordinance 2018 - Key Elements and Effective Dates

https://www.ird.gov.hk/eng/ppr/archives/18071601.htm

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IRD-Double Taxation Relief and Exchange of Information Arrangements

https://www.ird.gov.hk/eng/tax/dta1.htm

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