On 13 July 2018, the Inland Revenue (Amendment) (No. 6) Ordinance 2018 was gazetted. The Amendment Ordinance primarily implements the minimum standards of the Base Erosion and Profit Shifting (BEPS) package promulgated by the OECD and codifies the transfer pricing principles into the Inland Revenue Ordinance (Cap. 112) (IRO).
Under the Amendment Ordinance, the ultimate parent entity of a multinational enterprise (MNE) group (which is tax resident in Hong Kong) is required to file country-by-country (CbC) reports to the Inland Revenue Department (IRD) for exchange with other relevant jurisdictions if the annual consolidated group revenue is not less than HKD 6.8 billion.
The Amendment Ordinance also requires taxpayers to prepare master files and local files as part of the transfer pricing documentation, subject to certain exemptions. In addition, the Amendment Ordinance gives a statutory basis to the cross-border dispute resolution mechanism (i.e. mutual agreement procedure and arbitration) and advance pricing arrangement, which were previously implemented based on IRD's administrative rules.
The key elements of the Amendment Ordinance are summarized below:
| Key Element | Effective Date |
|---|---|
| enhancements to double taxation relief provisions | apply to tax payable for a year of assessment beginning on or after 1 April 2018 |
| transfer pricing rules and related provisions | – apply to a year of assessment beginning on or after 1 April 2018 for arm's length principle, advance pricing arrangement and changes in trading stock;
– apply to a year of assessment beginning on or 1 April 2019 for separate enterprise principle and taxation of income from intellectual property accrued to non-Hong Kong resident associates; and – grandfathering of transactions effected or income accrued before 13 July 2018. |
| TP documentation requirements relating to master file, local file and CbC reporting | – apply to an accounting period beginning on or after 1 January 2018 for CbC reporting;
– apply to an accounting period beginning on or after 1 April 2018 for master file and local file; and – voluntary filing of CbC reporting allowed for an accounting period beginning in 2016 or 2017. |
| amendments to preferential regimes, including extension of tax concession to domestic transactions and prescription of thresholds for substantial activities requirements | – apply to tax payable for a year of assessment beginning on or after 1 April 2018; and
– threshold requirements will be prescribed after consulting the relevant stakeholders. |
The IRD will promulgate guidance to facilitate taxpayer's understanding of the requirements under the Amendment Ordinance in due course. Further developments will be reported in due course.