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IRO on "transfer pricing rules": 

  • The fundamental transfer pricing rule ("Rule 1", Section 50AAF) in the Bill has the effect of requiring a tax adjustment when connected parties have entered into transactions where the pricing of those transactions differs from an arm's length price and that difference results in a potential Hong Kong tax advantage (defined in section 50AAJ).
  • Rule 2 has a similar effect to Rule 1, Rule 2 applies the attribution of profits to a permanent establishment of a non-Hong Kong resident using the separate enterprise principle; however, Rule 2 does not apply to foreign PEs of a Hong Kong resident company
  • (Reference:Asia-Pacific Journal of Taxation, Volume 22, Number 1, 2018)



  • Transfer Pricing documentation requirement: "three-tiered" 1, Master Files; 2. Local File; and 3. Country-by-Country (CbC) report.
  • a Hong Kong taxpayer meeting any two of is exempted from preparing the Master File and Local File:
    • Total annual revenue not exceeding HK$400 million
    • Total value of assets not exceeding HK$300 million
    • Average number of employees not exceeding 100
  • Certain qualifying domestic transactionscan be excluded from the thresholds and do not need to be documented in the Local File.


Certain domestic transactions not subject to the arm's length principle.

To be excluded from complying with the arm's length principle, all of the following conditions must be met:

  • the domestic nature condition;
  • the no actual tax difference condition or the non-business loan condition; and
  • the "one of the main purposes" test.


  • CbCR Notification is to provide IRD with relevant information on gourp's UPE and Surrogate Parent Entity ("SPE").
  • A Hong Kong resident entity as well as Hong Kong branches/permanent establishments of foreign companies of a multinational enterprise group whose annual consolidated group revenue for the immediately preceding accounting period reaches the specified threshold amount of HK$6.8 billion, is required to file a CbCR Notification containing information relevant for determing the obligation for filing a CbC Return.
  • A CbCR Notification is required to be filed electronically through the CbC Reporting Portal. 

Transfer Pricing and locality of profits [extract from HKICPA APlus - August 2019: [Inland Revenue Department interpretations of Hong Kong’s transfer pricing regime]: Clarification has also been given that Hong Kong’s long-established territorial source principle of taxation will not be affected by the introduction of the TP ordinance. Instead, the TP ordinance requires the computation of income or profits from transactions with associated persons to follow the arm’s length basis before the territorial source principle is applied to determine the chargeability of income or profits to Hong Kong profits tax.

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2 Answers

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Transfer Pricing Master File's possible Table of Contents

  1. Definitions
  2. Executive Summary
  3. Purpose and Scope
  4. Overview of the Group
  5. Value Chain and Supply Chain Analysis
  6. Functional Analysis
  7. Important Service Arrangements
  8. Group intangibles assets
  9. Intercompany financial activities
  10. Financial and tax positions
answered by (10.4k points)