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Tax Insights
from Transfer Pricing
Tax Controversy and Dispute Resolution
Hong Kong concludes first bilateral
advance pricing arrangement with
Japan
January 27, 2015
In brief
Recently, the Inland Revenue Department (IRD) of Hong Kong concluded a bilateral advance pricing
arrangement (APA) with the Competent Authority of Japan. This represents the second bilateral APA
concluded between Hong Kong and its double taxation agreement (DTA) partners since Hong Kong’s
APA programme came into effect in April 2012.
Given the IRD’s commitment to Hong Kong’s APA programme, combined with the expanding tax treaty
network of Hong Kong and developments in the international transfer pricing landscape, multinational
corporations (MNCs) looking to achieve certainty on their tax positions and avoid hassles of potential tax
controversies and disputes should consider APAs to be an effective option.
In detail
IRD’s growing
sophistication in analysis
and negotiations and
increasing priority to APAs
The first bilateral APA between
the IRD and the competent
authorities of Japan has been
recently concluded. The
bilateral APA covers the types of
related party transactions
commonly found in MNCs and
therefore carries considerable
precedential value for MNCs.
The APA team (sitting within
the Tax Treaty Section) of the
IRD remained independent in
the overall process. The
domestic review of the
application package and
supporting information and
analysis was undertaken by the
assessors-in-charge of the
Profits Tax Section, which is
separate from the Tax Treaty
Section. Upon completion of the
domestic review, information
was passed to the APA team.
The APA team formed their view
and position for the purposes of
the competent authority
negotiations on the basis of the
domestic review findings.
This is the second bilateral APA
signed between Hong Kong and
its DTA partners since the
launch of its APA programme in
April 2012. The first bilateral
APA was concluded only seven
months ago, in June 2014,
between Hong Kong and the
Netherlands. The success of a
bilateral APA between Hong
Kong and its important trading
partner of Japan is an
encouraging signal to MNCs
with establishments in both
Japan and Hong Kong.
Moreover, the sophistication of
the IRD in technical analysis
and negotiation skills as
demonstrated throughout the
whole APA process reveal the
IRD’s readiness to engage in
bilateral APAs with its broader
network of DTA partners going
forward.
The short timeframe between
the conclusion of the first and
second bilateral APAs indicates
the IRD’s devotion to its APA
programme. The IRD currently
has two dedicated officials of
assessor to senior assessor post
leading the APA programme
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under the supervision of the Deputy
Commissioner (Technical) and the
Chief Assessor (Tax Treaty).
Tax treaty network of Hong Kong
and international transfer pricing
landscape
Hong Kong has been expanding its
DTA network. Hong Kong has to date
signed 32 comprehensive DTAs with
other countries. In addition, Hong
Kong is in the process of negotiation
for 13 comprehensive DTAs with other
countries such as Germany, India and
Russia. The proliferation of tax
treaties increases the opportunity for
MNCs to apply for bilateral or
multilateral APAs in relation to
related party transactions between its
companies in Hong Kong and other
countries.
The initiatives of the Organisation for
Economic Co-operation and
Development (OECD) on base erosion
and profit shifting (BEPS) place
strong emphasis on tax transparency.
Tax jurisdictions including Hong
Kong have been entering into
standalone tax information exchange
agreements or including an exchange
of information clause in their tax
treaties.
On 16 September 2014, the OECD
finalised its guidance in relation to
transfer pricing documentation and
country-by-country (CbC) reporting.
Under the new guidance, MNCs will
be required to prepare three-tiered
transfer pricing documentation,
namely a master file (Tier 1), a local
file (Tier 2) and a CbC report (Tier 3).
Specifically, the Tier 3 documentation
mandates the reporting of extensive
details such as MNCs’ main business
activities, revenue, profit, taxes,
employees and tangible assets on a
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country-by-country basis1. Coupled
with the increasing tax transparency
as promoted by OECD’s BEPS
initiatives, tax administrations will
have access to more information to
conduct a transfer pricing risk
assessment and select audit targets.
As compared with the situation of tax
controversies and disputes,
information sharing and discussions
between taxpayers and tax
administrations in the APA process is
far more cooperative and supportive.
The takeaway
For MNCs in Hong Kong which are
keen on achieving certainty on their
tax position and minimising potential
hassles in tax controversies and
disputes, APAs are an effective option.
Bilateral APAs have been concluded
with Japan and the Netherlands to
date; and it is expected that the IRD
would be concluding bilateral APAs
with other countries in the future as
part of their current pipeline. The
continuous commitment and everincreasing sophistication of the IRD in
handling APAs are positive factors to
MNCs.
For further information, refer to
PricewaterhouseCoopers’ Tax Insights
from Transfer Pricing – Tax Policy
Bulletin titled OECD finalises
guidance on transfer pricing
documentation and country-bycountry reporting and dated 24
September 2014.
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Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your regular PwC contact or one of the
individuals listed below:
Transfer Pricing and Tax Controversy
Rhett Liu, Hong Kong
+852 2289 5619
[email protected]
Cecilia Lee, Hong Kong
+852 2289 5690
[email protected]
Colin Farrell, Hong Kong
+852 2289 3800
[email protected]
Financial Services
Phillip Mak, Hong Kong
+85 2289 3503
[email protected]
David McDonald, Hong Kong
+852 2289 3707
[email protected]
Transfer Pricing Global and US Leaders
Isabel Verlinden, Brussels
Global Transfer Pricing Leader
+32 2 710 44 22
[email protected]
Horacio Peña, New York
US Transfer Pricing Leader
+1 646 471 1957
[email protected]
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