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Transfer Pricing Tax Alert - 29 March 2012 - EY - China

Hong Kong Tax Transfer Pricing Alert: 29 March 2012Hong Kong releases final guidelines on APA program

Transfer Pricing Contacts

Hong Kong

Martin Richter
+852 2629 3938


On 3 January 2012 the Hong Kong Inland Revenue Department (HKIRD) announced that it plans to introduce an Advanced Pricing Arrangement (APA) program in Hong Kong by April 2012.

This was followed on 18 January by the HKIRD releasing a draft version of Departmental Interpretation and Practice Note 48 – Advance Pricing Arrangements (DIPN 48), outlining its proposed approach to administering, negotiating and concluding an APA program in Hong Kong. Draft DIPN 48 was open to a consultation process in which EY was closely involved. (See our tax alert on 20 January for a summary.)

On 29 March 2012, the HKIRD released a finalized version of DIPN 48, responding in detail to the various points raised during the consultation process. The following clarifications were made in the finalized version of DIPN 48:






  • The HKIRD will allow for pre-filing meetings on a no-names basis, with the condition that sufficient information is provided to make the discussion meaningful.
  • The draft DIPN 48 had suggested that a covered transaction must be greater than HK$100 million for each year to be considered under the APA program.  This has now been lowered to HKD$80 million for tangible transactions, HKD$40 million for services, and HKD$20 million for intangibles, per annum. 
  •  “Collateral issues” have been defined more clearly as issues that are distinct from transfer pricing issues (e.g., legal, tax treaty or tax avoidance issues). In addition, DIPN 48 recognizes that collateral issues need not exist in every case, and will be resolved as part of the APA only if considered necessary.
  • The draft DIPN 48 had expressed a preference for all transfer pricing issues and controlled transactions of an enterprise to be considered in an APA. The finalized DIPN 48 no longer explicitly states this preference, recognizing that multinational enterprises could have high risk and low risk controlled transactions or different lines of business that need not all be covered within the scope of an APA.  The finalized DIPN 48 recognizes, however, that limiting an APA to a specific transaction or issue may not be appropriate if the transaction is highly inter-related with other transactions.
  • Additional clarification has been provided on the use of independent experts to make it clear that the appointment of an independent expert is a useful mechanism in the event that a Mutual Agreement Procedure stalls or an APA negotiation gets into a deadlock position.  The language is also reflective of the fact that an independent expert would be brought in only when required and is not a compulsory requirement for every case. The purpose of an independent expert is to help process the APA application and is not meant to be a mediation mechanism.
  • DIPN 48 states that an APA will not have retrospective application and that years prior to an APA can still be subject to an audit. However, there may be scope to allow for the rollback of a transfer pricing methodology agreed under an APA to prior years depending on the circumstances of the case.
  • Although the HKIRD has maintained its preference for bilateral or multilateral APAs, it has expanded the scope under which it will consider unilateral APAs. The draft DIPN 48 had suggested that unilateral APAs would only 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. The HKIRD has now expanded this scope to also allow for a unilateral APA where transactions covered by a bilateral or multilateral APA are integrally linked with a transaction with a non-DTA state.
  • Lastly, in response to comments regarding the onerous information requirements for the pre-filing stage described in the draft DIPN 48, the HKIRD has clarified that the list of documentation to be provided under the pre-filing stage is not meant to be a prescriptive list, and that the actual documents required will be determined on a case-by-case basis (i.e., depending on complexity and risk level of the transaction).

Overall, we believe that the HKIRD has positively considered feedback from the consultation process, with the finalized DIPN 48 providing clarifications and detailed guidance on the application and process of the Hong Kong APA program. With lower thresholds, expanded unilateral APA scope, lighter pre-filing requirements and pre-filing meeting on no-name basis, the APA program is now more attractive to taxpayers under the finalized guidelines compared to the draft version.

Additionally, the HKIRD have indicated in a letter response to the consultation process that it intends to create a post for a dedicated senior assessor to lead the APA program, alongside three new additional assessors as part of the tax treaty team. There is no intention to utilize existing field audit investigators to administer the APA program. We believe that dedicated APA resources are critical to the success of the APA program.

This is the first time that the HKIRD have devoted significant resources specifically to transfer pricing related issues, which we believe may signal an increased focus on transfer pricing within the HKIRD in the future.


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