Transfer Pricing

15 January 2021

Transfer pricing (“TP”) refers to the setting of prices for transactions of goods, services and intangible property between associated enterprises.

Globalisation has increased the number of cross-border transactions between associated enterprises. This has also created opportunities for cross-border tax avoidance by taking advantage of differences in tax regimes across jurisdictions. This problem is commonly referred to as Base Erosion and Profit Shifting (“BEPS”). More specifically, BEPS is generally achieved by exploiting the gaps and mismatches in tax rules by multinational enterprises (“MNEs”) to artificially shift profits to low or no-tax locations where there is little or no economic activity.

The Organisation for Economic Co-operation and Development (“OECD”) has developed a package of measures aiming to counter BEPS issues in a coordinated and comprehensive manner. Undoubtedly, TP risk has become one of the most important issues in the international tax arena as governments around the globe have been paying increasing attention to MNE’s TP policies. Failure to manage TP issues adequately would definitely pose significant tax risks to a MNE’s operation.


Hong Kong Transfer Pricing Measures


Against the above backdrop, Hong Kong has introduced specific TP provisions into its domestic tax laws in July 2018. These provisions primarily implement the minimum standards of the BEPS package promulgated by the OECD and codifies the TP principles into the Hong Kong Inland Revenue Ordinance (“HK IRO”). Prior to these legislations, the Hong Kong Inland Revenue Department (“HK IRD”) only relied on the general provisions in the HK IRO and its own practice notes to deal with TP issues.

The Hong Kong TP provisions require income or loss from transactions between associated person to be computed on an arm’s length basis. Otherwise, the IRD is empowered to impose TP adjustments to either income or loss that gives rise to Hong Kong tax advantage. For this, arm’s length pricing documentation should be put in place.

In addition, the TP provisions also impose the requirements of preparing specified TP documentation for the so-called MNE group, which adopts the OECD’s standardised three-tiered approach as follows:

  1. Country-by-country reporting (“CbCR”), which contains information relating to the global allocation of income and taxes paid together with certain indicators of the location of economic activities of a MNE group
  2. Master file, which contains a high-level overview of the group of enterprises, including the global business operations and TP policies
  3. Local file, which contains detailed transactional TP information specific to the enterprise in each jurisdiction, including details of material controlled transactions undertaken by the enterprise and associated enterprises involved, amounts involved in those transactions and TP analysis with respect to those transactions


Country-by-Country Reporting


A MNE group (“Reporting Group”) is required to file a CbCR in relation to an accounting period where:

  • the consolidated group revenue for the preceding accounting period is at least EUR750 million (or HK$6.8 billion); and
  • the group has constituent entities or operations in two or more jurisdictions.

The primary filing obligation of CbCR is on the Hong Kong ultimate parent company of a Reporting Group. A Hong Kong entity of a Reportable Group whose ultimate parent company is not resident in Hong Kong may also be subject to a secondary obligation of filing a CbCR in Hong Kong under certain circumstances.

The entity which is required to file CbCR (“Reporting Entity”) has to register a CbCR Account under the CbCR Portal developed by the IRD. The person authorised to register a CbCR Account for the Reporting Entity has to possess an e-Cert (Organisational) with AEOI Functions for authentication purposes. Such person would be able to handle the following tasks relating to CbCR in the Portal.

  • Submit notifications of obligations to file CbC Returns
  • Submit notifications of change of address
  • File CbC Returns
  • Receive or send messages in relation to CbCR.

Alternatively, the Reporting Entity may appoint a Service Provider (who is also required to possess an e-Cert (Organisational) with AEOI Functions) to register and/or operate the CbCR Account on its behalf, a service we can assist with.


Transfer Pricing Global Documentation & Forms


If taxpayers had transactions with non-Hong Kong associated entities, they are required to complete and furnish information as requested by the HK IRD in the Supplementary Form S2 – Transfer Pricing regardless of whether they are required to file the CbCR and/or prepare the Master and Local File. The requested information includes relevant details of the associated entities, whether a master file and a local file has to be prepared and the relevant CBCR filing obligations (if applicable).

Master File and Local File

A Hong Kong entity of a group engaging in transactions with associated entities is required to prepare a master file and a local file, subject to the following exemptions.

  1. Exemption based on size of business

A Hong Kong entity, which satisfies any two of the conditions below will not be required to prepare a master file and a local file for an accounting period:

  • the total amount of the entity’s revenue for the relevant accounting period does not exceed HK$400 million.
  • the total value of the entity’s assets at the end of the relevant accounting period does not exceed HK$300 million.
  • the average number of the entity’s employees during the relevant accounting period does not exceed 100.
  1. Exemption based on amount of controlled transactions

If the total amount of a type of controlled transactions undertaken by a Hong Kong entity for an accounting period does not exceed the following prescribed threshold, the local file of the entity in respect of the accounting period will not be required to cover that particular type of transactions:


                     Type of transactions                                          Amount (HK$)


Transfers of properties (whether movable                                   $220 million

or immovable but excluding financial 

assets and intangibles)


Transactions in respect of financial assets                                   $110 million


Transfers of intangibles                                                                $110 million


Other transactions                                                                        $44 million


If the total amount of each type of controlled transactions undertaken by the Hong Kong entity does not exceed the above threshold, it will not need to prepare a master file and a local file.

  1. Exemption for specified domestic transactions

The local file of a Hong Kong entity in respect of an accounting period need not cover specified domestic transactions. Such transactions are to be disregarded in determining whether the thresholds as mentioned in item 2 above are exceeded.

If the above exemption does not apply, a master file and a local file will have to be prepared no later than 9 months after the end of its accounting period.


Case Study


One of our clients is an international group in the automotive business and a supplier for one of the main global car manufacturers. The group has R&D centres, productions facilities and sale & technical offices in different countries including the Mainland China. The Chinese subsidiary (CN Co) is a manufacturer as well as a distributor of automotive parts in China.

CN Co had significant amounts of transactions with overseas group entities since it leveraged heavily on the headquarters’ research and development capacity as well as technical support from other overseas group companies for its manufacturing and distribution businesses in China. We assisted CN Co with the preparation of the master file and the local file in fulfilling the requirements of the Chinese TP provisions.


Global Transfer Pricing Services


We can assist you with each steps in navigating through the complex TP rules and regulations and fulfilling the TP requirements at both the global and the country-specific level. Our services are tailored to your circumstances and offer practical solutions that meet your specific needs. These include:-

  • Global and country-specific TP documentation in accordance with the tax authorities’ requirements
  • TP investigations from the tax authorities
  • Cost sharing arrangement
  • Global tax efficient supply chain strategies
  • OECD policy analysis
  • Tax Health check on TP policies
  • TP strategy planning


Contact us now to learn more:


If you have any questions regarding the above or other tax matters, please do not hesitate to contact us on +852 2804 0889 or by email [email protected].


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