China and Hong Kong Cooperate on Transfer Pricing

May 18, 2010 Taxation in ChinaTaxation in Hong Kong

Hong KongThe Hong Kong Inland Revenue Department (IRD) and the State Administration of Taxation (SAT) of the People’s Republic of China recently held a public conference, where both administrations demonstrated a commitment to collaborating on issues surrounding transfer pricing (TP) and associated taxation matters. The conference was intended to provide insights into both administrations’ legislative perspectives and increase certainty surrounding transfer pricing and tax avoidance issues for cross-border business.

At the conference the IRD emphasized its acceptance and attempts to closely follow the Organization for Economic Cooperation and Development’s (OECD) Transfer Pricing Guidelines for assessing and reviewing clients’ TP arrangements and methods. The SAT added that it has been actively leading emerging economies in a number of United Nations (UN) organized TP development initiatives, such as the UN Practical Manual on Transfer Pricing. Both jurisdictions also highlighted their continued efforts to increase Government transfer pricing expertise through continued training and international knowledge sharing.

Both the SAT and IRD spoke about perceived technical ambiguities in their respective legislation. The IRD emphasized its stance on the non-deductibility of retrospective payments made as a result of TP adjustments carried out during the year. The SAT, along with the IRD, confirmed that it will regard entity branches and overseas permanent establishments as separate entities in regards to TP. The IRD reiterated that it will apply TP laws to not only international transactions but also domestic related party transactions. Conversely, SAT stated that it is currently in the process of implementing more stringent domestic transfer pricing regulations. Both parties also announced their full endorsement towards the use of the OSIRIS database, a source of detailed information on large listed and unlisted international companies, by taxpayers and tax officials in analysis of TP procedures.

The SAT mentioned the possibility of expanding the two economies’ current Double Taxation Agreement (DTA) to include provisions for a bilateral Advance Pricing Agreement. Although the IRD stated that it is not yet in the capacity to adequately facilitate such an agreement, but is open to receive any advance ruling applications for the purposes of TP legislation.

Photo by Arno_BOP