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Transfer Pricing Tax Alert - 20 January 2012 - The APA application process - EY - China

Hong Kong Tax Transfer Pricing Alert : 20 January 2012

The APA application process

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Transfer Pricing Contacts

Hong Kong

Martin Richter
+852 2629 3938


Financial Services

Patrick Cheung
+852 2846 9905


The draft DIPN 48 outlines five stages for the application, negotiation and conclusion of an APA.

Stage 1 – Pre-filing meeting

This is a preliminary stage wherein the scope of the proposed APA is outlined and any “collateral issues” are identified. One month prior to the pre-filing meeting, the taxpayer should submit to the HKIRD a proposal outlining the scope and nature of the proposed APA.

During the pre-filing meeting, the HKIRD will define what it considers to be the scope of the APA. It will also identify the collateral issues and outline potential resolution approaches.

The draft DIPN 48 notes that pre-filing meetings do not bind the enterprise or the Commissioner to the APA process.

In the event that consensus is achieved between the taxpayer and the HKIRD that an APA application should move forward, the taxpayer and HKIRD should jointly develop an APA case plan that outlines a structured timeline and work plan. After receiving a formal APA application from the taxpayer, the HKIRD will contact the relevant treaty partner Competent Authority(ies) to establish a timetable for the APA.

Stage 2 – Formal application

The taxpayer should submit a formal APA application form to the HKIRD containing the scope of the proposed APA and the treatment approach of collateral issues to the HKIRD. The application should include details of the proposed transfer pricing methodology and relevant facts and analyses regarding the arm’s length nature of the covered transactions.

The HKIRD will review the application to confirm that it is consistent with the terms agreed upon during the pre-filing meeting. Once the HKIRD completes the review and accepts the application, it will contact the relevant DTA partner(s) to confirm its(their) desire to participate in the APA process and to establish a timetable.

Stage 3 – Analysis and evaluation

This stage involves discussions between the HKIRD and the taxpayer to understand the facts of the case and critically evaluate the information provided. The information to be shared is determined based on the facts and circumstances of each case.

The HKIRD can also request the taxpayer to provide an independent expert or alternatively engage its own expert to evaluate the taxpayer’s transfer pricing methodology.

Stage 4 - Negotiation and agreement

The taxpayer will initiate the mutual agreement procedure (MAP) for the HKIRD to liaise and negotiate with the relevant DTA partner(s).

The HKIRD will provide the taxpayer with the opportunity to contribute towards draft APA terms, which forms the basis of the negotiation with the DTA partner(s). However, the taxpayer will not have the right to attend the Competent Authority(ies) negotiations.

Following the review, discussion and negotiations, the HKIRD along with the DTA partner(s) will formalize the MAP arrangement. The taxpayer can choose to either accept the MAP arrangement or reject it. If rejected, the APA process would cease and a unilateral APA will not be offered.

Alternatively, if the negotiations with the DTA partner(s) were to fail then a unilateral APA might be considered.

Stage 5 – Drafting, execution and monitoring

Once the MAP arrangement is accepted, the HKIRD will enter into a bilateral or multilateral APA with the DTA partner(s) and with the taxpayer. The taxpayer has to prepare and submit annual compliance reports for the duration of the APA.

APA renewals

An APA may be renewed with the consent of all the parties to it, including the DTA partner(s). The renewals may also be eligible for the APA extension process provided all parties agree to a possible further three- to five-year period.

Rollback of APA

We understand the HKIRD is generally reluctant to consider rollback requests. However, there appears to be scope for rollback; the principles developed in an APA could provide the basis for resolving issues in prior years’ audits, as well as past years not yet under audit.

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