Hong Kong has updated the guidance on its advance pricing arrangement (APA) regime to reflect recent legislative changes and the streamlining of the APA process.
Departmental Interpretation and Practice Note (DIPN) No. 48 (revised) was issued by the Inland Revenue Department on 15 July 2020, replacing the previous DIPN issued in March 2012. DIPN No. 48 (revised) contains updates in the following areas:
- the definition of controlled transactions, which refers not only to transactions between associated persons, but also transactions between different parts of the same person (such as between branches and head offices). In addition, attribution of profits to a permanent establishment of a non-resident person in Hong Kong can be the subject matter of an APA (paragraph 5);
- the latest relevant domestic legislation in relation to the APA regime, i.e. the Inland Revenue (Amendment) (No. 6) Ordinance 2018, which incorporated the international transfer pricing rules into the tax law and provided a statutory framework for the APA regime;
- suitability of concluding an APA, with indicators provided where the Commissioner may be more/less likely to enter into an APA (such as whether the transfer pricing methodology adopted is consistent with OECD guidelines, the complexity of the transfer pricing issues, the probability of double taxation or non-taxation, and whether the proposed arrangements are primarily tax-driven), the treatment of carried forward losses, and the presence of tax avoidance issues (paragraphs 18-28);
- streamlining of the APA process from 5 stages to 3 stages, namely early engagement, APA application and monitoring and compliance. The key changes made are delivery of a more balanced approach to understand the totality of the controlled transactions, deliberate early engagement stage with a more rigorous approach if necessary, and greater focus on identifying and appropriately considering collateral issues (paragraphs 29-30);
- the right of the tax authorities to refuse to make an APA (such as where fees have not been paid) and the applicant's right to withdraw an APA application (paragraphs 152-154);
- the management of the APA process, particularly by the Deputy Commissioner (Technical), who takes overall charge of the APA programme (paragraph 181);
- introduction of offences and penalties, including penalties on more/less serious offences, additional tax, and consideration for taking penal action (paragraphs 182-196); and
- three updated annexes (Appendix 2, 3 and 5) on a model APA case plan, contents of an APA application and a Model APA respectively; three new annexes (Appendix 1, 4 and 6) on details to be provided in a request for early engagement, a template for spontaneous exchange of information on cross-border unilateral APAs and a model annual compliance report respectively.
DIPN No. 48 (revised) is available here.