Hong Kong

Market overview

The OECD's BEPS Project is the hottest topic in the transfer pricing market in Hong Kong at the moment. It is greatly impacting the transfer pricing landscape, particularly through localised BEPS initiatives and more aggressive tax audits in Hong Kong.

Hong Kong is moving away from its isolated tax position by joining in more closely with international tax discussions. On June 20 2016, Hong Kong announced it would join the BEPS Project as an associate jurisdiction, meaning that Hong Kong is committed to implementing the four minimum standards under BEPS, namely: Action 5: Countering harmful tax practices; Action 6: Preventing treaty abuse; Action 13: Transfer pricing documentation; and Action 14: Enhancing dispute resolution.

"We have to look at the 15 BEPS action items to see how Hong Kong can work with the other associates in terms of enhancing tax compliance and transparency in terms of taxpayers' information," said Philip Wong of Deloitte.

It is also notable that Hong Kong has concluded 35 double taxation agreements as it moves closer to the centre of the international tax stage. The common reporting standard (CRS) will also be active in Hong Kong by the end of 2018.

These new transfer pricing rules, and the anticipated initiatives such as country-by-country reporting (CbCR), being implemented in Hong Kong will undoubtedly increase compliance costs for most taxpayers.

"Taxpayers have to become either more technical or more sophisticated," said Wong. "Technical means they have to grab the information within their reporting. Sophisticated means that because CbCR can be very laborious, from an IT perspective, they have to find a way to track down the information in order to make the report," said Wong.

Triggered by the BEPS initiative, there has also been a noticeable increase in the volume of tax audits in Hong Kong. "Historically, given Hong Kong's relatively competitive tax landscape, subsidiaries of multinationals operating in Hong Kong often retained more than an arm's-length return for their contribution", said Martin Richter, head of transfer pricing at EY. "With the focus of BEPS on the allocation of a multinational's global profits across group contributors along the supply chain, many multinationals have been revisiting their transfer pricing arrangements, and often reducing profits in Hong Kong to arm's-length levels."

He also added that consistent with BEPS, the deductibility of base-eroding charges such as management service charges, royalty charges, and other inter-company outbound charges were the major focus for the tax audits.

Tax professionals predict the activities surrounding BEPS will only increase in Hong Kong in the coming years.

Tax authorities

Inland Revenue Department
Revenue Tower, 5 Gloucester Road, Wan Chai, Hong Kong
Tel: +852 2187 8088
Fax: +852 2519 9316
Email: taxinfo@ird.gov.hk
Website: www.ird.gov.hk

Tax rates at a glance

(As of January 1 2016)

Corporate income tax rate 16.5%
Capital gains tax rate 0%
Branch tax rate 16.5%
Withholding tax
Dividends 0%
Interest 0%
Royalties from patents, know-how, etc.
Paid to corporations 4.95/16.5% (a)
Paid to individuals 4.5/15% (a)
Branch remittance tax 0%
Net operating losses (years)
Carryback 0
Carryforward Unlimited

  1. This is a final tax applicable to persons not carrying on business in Hong Kong. The general withholding tax rate is 4.95% for payments to corporations. For payments to individuals (including unincorporated businesses), the general withholding tax rate is 4.5%. However, if a recipient of payments is an associate of the payer and if the intellectual property rights were previously owned by a Hong Kong taxpayer, a withholding tax rate of 16.5% applies to payments to corporations and, for payments to individuals (including unincorporated businesses), a 15% rate applies.

Source: EY 2016 Worldwide Corporate Tax Guide