Cross-border operations: source and transfer pricing

Source and structure

The tax starting point for any structure is the DIPN 21 operations test: where procurement, IP holding and regional management sit in separate entities, each entity’s profits follow its own operations. The chart must match where decisions are actually taken and where people sit, or both the source claim and the transfer pricing will be challenged.

Transfer pricing rules

Related-party dealings follow the arm’s-length principle (IRO ss.50AA/50AAF; DIPN 58). Intra-group loans, service fees and royalties need comparable benchmarks; the working methods are the OECD set — CUP, RPM, TNMM and their counterparts.

Documentation thresholds

A Master File and Local File may be dispensed with only if the size test (two of three) and the related-party transaction test are both met (see table). A Local File must be in place within 9 months of the accounting period end, and submitted within one month of an IRD request. Companies near the thresholds should plan on preparing the files rather than assuming small size is a safe harbour.

Master File / Local File exemption thresholds

Country-by-country reporting

Groups whose ultimate parent consolidates revenue of HK$6.8 billion or more (about €750 million) must file a CbC report within 12 months of the group year-end; Hong Kong entities also owe a notification identifying the reporting entity.

Resolving double taxation

Disagreements between Hong Kong and the Mainland over the same profit can be taken to the mutual agreement procedure under the Arrangement; the completeness of the documentation before the dispute largely determines whether the MAP succeeds.