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Transfer pricing documentation rules in line with global standards have been in place in Hong Kong since the release of Inland Revenue (Amendment) (No. 6) Ordinance 2018 in July 2018. However, there has always been a question mark over how actively the Inland Revenue Department (IRD) would enforce the compliance rules and use the disclosed information to introduce a transfer pricing audit program. It seems these questions have now been answered with the release of Form IR1475 and the commencement of compliance reviews.
By way of background, the Hong Kong transfer pricing rules follow the OECD’s approach to the master file, local file and country-by-country reports, albeit with high thresholds meaning that only larger taxpayers are subject to these requirements. The master file and local file are required to be available within nine months of the taxpayer’s year end and should be submitted within 30 days of a request.
Form IR1475 has been sent to several taxpayers who indicated on their tax returns that they have a requirement to prepare transfer pricing documentation. The form is a summary of the contents of the local file and master file, although it also includes additional elements related to:
At this stage, the focus is on taxpayers with a 31 March year end, however it is expected to be rolled out further in coming months.
As noted, the release of Form IR1475 indicates that the IRD intends to devote effort and resources to ensuring transfer pricing compliance. The form will serve as a tool for the IRD to identify high risk taxpayers for further scrutiny based on factors including the nature and size of the transactions, transacting with jurisdictions with lower tax rates than Hong Kong or claiming 'offshore' status for income where such claims may not be consistent with the transfer pricing profile of the Hong Kong taxpayer.
Following the path taken in the PRC, the information collected is expected to be used to commence an immediate investigation of the taxpayer if required, as well as to contribute to a dataset of taxpayer transfer pricing compliance behaviour to enable more effective audit screening and targeting in future.
To prepare, taxpayers should ensure their transfer pricing documentation (master file and local file) where required is up to date; that the form IR1475 disclosures are consistent with such documentation; and most importantly that the underlying transfer pricing policies will stand up to what will become a more systematic and rigorous review process in Hong Kong.