Transfer Pricing: Advance Pricing Arrangement (HK)

 

As Advance Pricing Arrangements are shortly going to be introduced in the Indian Transfer Pricing Legislation, it is a good idea to get acquainted with similar legislation in other parts of the World as well.
The Inland Revenue Department, Hong Kong, has released a comprehensive “Departmental Interpretation and Practice Note No. 48 on the Advance Pricing Arrangement“. The salient features of this Note are as follows:

Transfer pricing and APAs
This Departmental Interpretation and Practice Note (DIPN) is intended to provide guidance for enterprises seeking an Advance Pricing Arrangement (APA). It explains the APA process and the terms and conditions of the APA process prescribed by the Commissioner.
2. The Commissioner agrees that the arm’s length principle is the international transfer pricing standard that should be used for tax purposes and the behaviour of independent enterprises should be used as a benchmark to determine the arm’s length consideration or profits in relation to controlled transactions.
3. In the comprehensive double taxation agreements (DTAs) concluded by Hong Kong, the Associated Enterprises Article has incorporated provisions which mandate the adoption of the arm’s length principle for pricing controlled transactions. When administering the provisions of the Inland Revenue Ordinance (IRO), the Commissioner will ensure that enterprises operating in Hong Kong declare a level of profit from controlled transactions that is commensurate with the functions carried out, the assets used, and the risks assumed in Hong Kong.
4. The APA process, which is voluntary, will supplement the objection, appeal and other DTA mechanisms for resolving transfer pricing issues. Its scope is flexible and it may cover all or part of the transfer pricing issues of an enterprise. The discussion of complex transfer pricing issues in a non-adversarial environment can stimulate the free flow of information and promote mutual understanding among all parties concerned. The Commissioner does not charge any fee on enterprises during the APA process but enterprises need to be aware that some overseas tax administrations may do so.