How will the transfer pricing bill impact business operations?

Inland Revenue Amendment Bill No.6 imposes additional requirements for domestic transactions.

The draft legislation codifying certain transfer pricing practices in Hong Kong may be more boon than bane as business operations of MNCs and SMEs run the slight risk of disruption by the bill’s additional compliance requirements and broad scope of application, according to accounting and professional services firm PwC. 

Inland Revenue Amendment Bill No. 6 serves to codify transfer pricing and introduce country-by-country reporting. It also aims to ensure that Hong Kong’s concessionary tax regime meets international standards outlined in the Base Erosion and Profit Shifting (BEPS) agenda laid out by Organisation for Economic Cooperation and Development (OECD).

However, the bill could raise the compliance requirements for domestic transactions of MNCs and its broad scope of application has the potential to even be applied to small businesses. At the extreme, it could even deter international mobile business from Hong Kong.

“The Bill encompasses provisions that appear to require individuals who are owner-managers of businesses to pay salaries tax on their personal dealings with their companies at market rates. Combined with its treatment of intellectual property, this draft legislation could create uncertainty for start-ups in the tech space, for example,” said PwC Hong Kong Transfer Pricing Director Peter Brewin.

At 162 pages, the bill is also one of the longest tax amendment Bills in Hong Kong and goes beyond the BEPS minimum standards that have been adopted in many other jurisdictions.

“It is understandable that the Inland Revenue Department should seek to introduce comprehensive legislation so that Hong Kong’s tax system is in line with international norms. But companies that are seeking to expand their operations in Hong Kong – particularly those that are dependent on R&D and intellectual property – will want reassurance that they will be able to operate in a flexible environment,” said PwC Hong Kong Transfer Pricing Services Partner Cecilia Lee.

The government targets to pass the transfer pricing bill into law by the end of the legislative session in May.