HLB Hodgson Impey Cheng Taxation Services Limited - DIPN No.48 - Advance Pricing Arrangement
On 29 March 2012, the Inland Revenue Department ("IRD") issued the Departmental Interpretation and Practice Notes No.48 ("DIPN 48") - Advance Pricing Arrangement ("APA"), which is a major step of the transfer pricing development in Hong Kong. APA application could be made to the IRD from April 2012, subject to the conditions set out in this practice notes.
APA is a mechanism whereby a taxpayer and a tax authority can enter into a voluntary agreement in advance on the criteria for determining transfer pricing for cross-border transactions between related parties. APA could be (i) unilateral (involving one tax authority); (ii) bilateral (involving two tax authorities); or (iii) multilateral (more than two tax authorities). The benefits of entering into an APA with a tax authority or authorities include reducing the risk of double taxation or disputes with tax authority on transfer pricing issues (e.g. transfer pricing audit, which could be time consuming and costly) or conflicts with customs and indirect tax reporting requirements.
As of today, the IRD has concluded Comprehensive Double Tax Agreements ("DTA") with 23 jurisdictions. In particular, over the past few years, the DTA network of Hong Kong has been expanded rapidly. This network provides the soil for the APA program.
In the DIPN 48, detailed guidelines and sample documents are provided for making the APA application. Mainly, there are 5 stages of the APA process:
| Stage 1: | Pre-filing
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| Stage 2: | Formal application
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| Stage 3: | Analysis and evaluation
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| Stage 4: | Negotiation and agreement
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| Stage 5: | Drafting, execution and monitoring |
As the APA program will require investment of considerable resources, the IRD has laid down the threshold for an APA application. For controlled transactions involving sales and purchase of goods, the amount should reach HK$80 million for each year covered in the APA. For services, the threshold is HK$40 million per annum. If the controlled transactions involved the use of intangible properties, the threshold is HK$20 million per annum.
Our observations
With the introduction of the APA program under DIPN 48, Hong Kong has now joined most of the world's major trading nations to have a set of APA procedures. Transfer pricing and APA are still new to Hong Kong taxpayers. In fact, the IRD's practice notes on transfer pricing (i.e. Departmental Interpretation and Practice Notes No.46 - Transfer Pricing Methodologies) was only issued in 2009. As compared to China, which concluded its first APA with an enterprise in 1998, and other more developed transfer pricing jurisdictions, Hong Kong still has a long way to go in this area.
The rapid growth of international trade, globalization and increasing government treasury deficits in major trading nations have led to the pro-active approach to challenge the transfer prices by many tax authorities. In the foreseeable future, this environment or trend will create a great deal of uncertainty for taxpayers operating in more than one jurisdiction. Reaching an APA with relevant tax authorities will be a way to eliminate such uncertainty.
One of the major parts of the APA process is the negotiation with other tax authorities to arrive at a proper transfer pricing solution for a particular case. With the growing trend of multinational groups and PRC enterprises setting up regional or global headquarters in Hong Kong, we expect that the IRD will receive APA applications in due course and the number should increase steadily. Due to the close economic relationship between Hong Kong and China, it is highly likely that there will be APA between Hong Kong and China.
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HLB International is a fast-growing, dynamic network of independent professional accounting firms and business advisers. Formed in 1969, HLBI is a leading mid-tier international accounting network, servicing clients through its member firms in over 100 countries.
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