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Transfer Pricing Tax Alert - 20 January 2012 - EY - China

Hong Kong Tax Transfer Pricing Alert : 20 January 2012

HKIRD seeking consultation on
APA program

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Transfer Pricing Contacts

Hong Kong

Martin Richter
+852 2629 3938


Financial Services

Patrick Cheung
+852 2846 9905


In line with the announcement of Commissioner of the Inland Revenue (CIR), on 18 January 2012 the Hong Kong Inland Revenue Department (the HKIRD) circulated a draft copy of “Departmental Interpretation and Practice Notes (DIPN) No. 48 – Advance Pricing Arrangements (APA)” to select industry bodies and discussion groups, welcoming comments to be received within a three week timeframe.


During a seminar on 3 January 2012 organized by the HKIRD, the CIR announced that the HKIRD would launch an APA program, with plans to start accepting APA applications from April 2012.

In its announcement, the CIR noted that a DIPN draft, outlining the HKIRD’s approach to APA requests, would be issued. Further, that the draft DIPN would be subject to a consultation process prior to its finalization.

Key observations from the draft DIPN 48 are as follows:

  • The HKIRD confirms that when considering the assessable profits in relation to intercompany arrangements, the arm’s length principle should be adopted.
  • The HKIRD notes that, while the scope of an APA is flexible, it has a preference for all transfer pricing issues of an enterprise to be covered.
  • An APA is not intended to agree on a precise actual profit figure to be taxed, but is aimed at agreeing on an appropriate set of criteria for determining arm’s length transfer pricing arrangements (i.e., method, comparables, critical assumptions, etc.).
  • An APA will typically apply for three to five years and it will be limited to bilateral or multilateral agreements, generally not to unilateral agreements. Unilateral agreements may be considered if a treaty partner does not wish to participate in an APA, or where the Hong Kong Competent Authority is unable to reach agreement with the relevant treaty partner.
  • APAs are most suitable for transfer pricing arrangements that are complex or involve a high degree of risk. For instance, cases where comparables cannot be identified, where a significant amount of tax is at stake, or where there is a significant shift of profits out of Hong Kong. Additionally, to be considered under the APA program, a covered transaction must be greater than HK$100 million for each year covered in the APA being sought.
  • The HKIRD targets concluding APAs within an 18-month timeframe, depending on the scheduling and progress of the negotiations with the Competent Authority(ies) of the DTA partner(s). A longer timeframe may be required in more complex cases.

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