Hong Kong to introduce transfer pricing, tax dispute resolution, country-by-country reporting legislation

The Hong Kong government will introduce new legislation on transfer pricing, country-by-country reporting, and tax dispute resolution by the end of 2017 which will be consistent with agreements reached under the OECD/G20 base erosion profit shifting (BEPS) plan, Hong Kong’s Inland Revenue Department (IRD) has announced.

Legislation implementing the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) will be introduced by mid-2018, the IRD said. Further, an amendments bill enabling Hong Kong’s implementation of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters is planned for the end of 2017.

The actions were announced in a July 31 IRD consultation report which followed up on a 2016 consultation soliciting stakeholder views on several government proposals to implement the BEPS plan agreements.

The IRD said that the consultation revealed broad support for the government’s proposal to implement the four BEPS minimum standards.

“We welcome the general support from the respondents for the proposed implementation strategy, which focuses on the four minimum standards set by the OECD (i.e., countering harmful tax practices, preventing treaty abuse, imposing a country-by-country reporting requirement, and improving the cross-border dispute resolution mechanism) whilst maintaining Hong Kong’s simple and low tax regime. Having regard to the comments received, we will fine-tune certain parameters of the proposals to address stakeholders’ concerns,” a government spokesman said.

The IRD also said there was broad stakeholder support for Hong Kong’s proposal to codify fundamental international transfer pricing standards into domestic legislation and thus the government will proceed with this proposal.

In response to stakeholder comments, the IRD will include definitions of relevant key transfer pricing terms and will propose specific transfer pricing provisions relating to intellectual property to account for the unique nature of IP and the lack of comparables.

The government rejected a proposal to exempt from the arm’s length standard transactions between two Hong Kong associated persons.

Further, legislation will provide for unilateral, bilateral, and multilateral advance pricing agreements, the government said. The IRD said it has no intention if introducing thin capitalization rules.

The legal framework for the three-tier transfer pricing approach of master file, local file, and country-by-country report will be provided for in legislation, including provisions for parent surrogate filing, the IRD said.

The government also confirmed that it will, in a separate bill, provide the legal framework to implement BEPS minimum standards through the MLI. Hong Kong has opted for a principal purpose test only rule, and will not accept  symmetrical nor asymmetrical application of a limitation on benefits rule for treaties covered by the MLI, the government said.

The government also said that it will introduce new legislation will enhance the current tax credit system and improve tax dispute resolution.

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