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Transfer Pricing
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What is transfer pricing?

Transfer Pricing is defined as the pricing of trade of goods, services and intangible assets between related entities. Entities under common control (directly or indirectly) of the same shareholder (including the holding company itself) shall generally be regarded as related entities. Common examples include subsidiaries, representative offices, headquarters and their branches.

The imposition of Transfer Pricing focuses on the concept in which related entities must be treated fairly: same pricing policy should be implemented as if the related entities are unrelated third parties under similar circumstances forming the transactions.  In recent years, transfer pricing has become one of the most important international tax issues of MNCs, as well as small-to-medium size entities.  The failure of the organization to meet the required standard risks may result in high costs by way of additional taxes, interest and fines imposed by the local tax authorities.

Related parties must deal with each other at arm’s length.

In recent years, transfer pricing has become one of the most important international tax issues facing multinational corporations, whatever their size. Organisations failing to fulfil the required standards risk incurring high financial costs in terms of additional taxes, interest and penalties imposed by the tax authorities.


The arm’s length principle


The arm’s length principle is the internationally endorsed standard for transfer pricing between related parties. When transfer prices of related parties adhere to this principle, they reflect comparability to the pricing that independent commercial entities in similar situations would transact at and hence, there will be no distortion in the profits and tax liabilities. Inland Revenue Department abides by this arm’s length principle and believes that this is the most appropriate standard to determine transfer prices of related parties.

Development of Transfer Pricing in Hong Kong:

Under the global trend of embedding Transfer Pricing concept into Law, the Hong Kong Inland Revenue (Amendment) (No. 6) Ordinance 2018 was gazetted on 13 July 2018 (or the Transfer Pricing Law) with the major objectives of:


  • Codify transfer pricing principles into Hong Kong Law;

  • Implement a number of measures in Erosion Tax Base and Profit Shifting (BEPS) program; and

  • Bring consistency of relevant provisions of the Inland Revenue Ordinance (chapter 112th) with international tax provisions.



Transfer pricing documentation is required to show that efforts have been made to ensure that the related party transactions are conducted at arm’s length.

The preparation and maintenance of adequate documentation will facilitate reviews by tax authorities and therefore help resolve any transfer pricing issues that may arise. Without adequate documentation to show that the transfer prices are at arm’s length, taxpayers may not be able to raise valid objections to prevent transfer pricing adjustments by tax authorities.

Inland Revenue Department does not require transfer pricing documentation to be submitted when tax returns are filed. However, selected taxpayers may be asked by Inland Revenue Department to show that their related party transactions are conducted at arm’s length.

What is Transfer Pricing Documentation?


Under the Hong Kong Transfer Pricing Law, three-tiered Transfer Pricing Documentation is implemented, which refers to:


  • Master File;

  • Local File; and

  • Country-by-Country Report (“CbCR”)

What enterprises need to prepare Transfer Pricing Documentation? 


Hong Kong companies are required to prepare the following stated Transfer Pricing Documentation if the listed conditions are reached.

Master File and Local File


If a Hong Kong entity meets the conditions of A) and B) below, the entity (or the Group it belongs to) needs to prepare both Master File and Local File:


A) Scale of Group meets either 2 of the following 3 points:


  • Total annual revenue exceeds HK$400 million

  • Total assets exceed HK$300 million

  • Average number of employees exceeds 100


B) Further, transactions involving Hong Kong affiliates between the Group companies meet any of the following four points:


  • Transfer of tangible assets (including current assets and real estate) exceeding HK$220 million

  • Financial asset transactions exceed HK$110 million

  • Transfer of intangible assets (including trademarks) over HK$110 million

  • Exceed HK$44 million for other transactions (such as service income)

What the tax authorities expect from Master File and Local File?


The Transfer Pricing Documentation needs to demonstrate that efforts have been made to ensure that related party transactions are conducted in a fair and equitable context. The preparation and preservation of appropriate documentation would facilitate the review by tax authorities and would therefore help to address any transfer pricing that might arise. In case there are insufficient documents / analysis to prove that the concerned pricing policy is fair, and taxpayers may not be able to raise valid objections to prevent tax authorities from adjusting transfer pricing.


The Inland Revenue Department does not require the submission of transfer pricing documents when submitting tax returns. However, the Inland Revenue Department may require selected taxpayers to prove that their associated transactions are fair and reasonable by requesting for benchmarking study or complete set of Transfer Pricing Documentation.

Country-by-Country Report (“CbCR”)

Group's revenue exceeds HK$6.8 billion with entities operating in two or more jurisdictions (the principal activities of the entities are irrelevant, i.e. even dormant companies count).


What information is required for Master File?


  • organizational structure

  • Structure of legal ownership

  • Geographical location of member entities

  • Description of the Group's business (including important sources of revenue)

  • Important service arrangement between related entities

    • Ability to provide services

    • How to allocate service costs

    • Transfer Pricing policies

  • Functional Analysis (key functions, risks and assets used by companies within the Group)

What information is required for Local File?

  • Description of the management structure

  • Detailed description of the business and implementation strategies

  • List our of major competitors

  • Description of key transactions

  • Detailed comparability and functional analysis

  • Transfer pricing methodology and reasons for choosing method


What are the principles of Arm's Length Principle?   


The Arm's Length Principle is an internationally recognized transfer pricing standard for related parties.  When the transfer price of the related party adheres to this principle, they reflect the comparability of the pricing of the transaction to be carried out by an independent commercial entity in similar circumstances, and therefore there will be no distortion in the profit and tax liabilities.  The Inland Revenue Department abides by this principle of fairness and considers it to be the most appropriate criterion for determining the transfer price of the related party.

What are the transfer pricing methodologies used in benchmarking report?

According to the guidance of Organization for Economic Co-Organization and Development (OECD), five transfer pricing methodologies are defined:


A: Traditional transaction methods

  1. comparable uncontrolled price method - CUPM

  2. resale price method – RPM

  3. cost plus method – CPLM


B. Transactional profit methods

  1. profit-split method – PSM

  2. transactional net margin method – TNMM


A-1. Comparable uncontrolled price method - CUPM

Compare the transaction prices between related party transactions and third party transactions, if there is a significant gap in the transaction price between the two, the price representing the transaction of the affiliated enterprise is not in accordance with the Arm' s Length Principle


A-2. Resale price method – RPM

Comparison of gross margin earned between related party transactions and third party transaction [gross margin / net sales], The gross margin earned by a non-affiliated enterprise is the normal price between the affiliated enterprises.


A3. Cost plus method – CPLM

At the cost purchased by the third party transactions, the transfer price of the affiliated enterprise becomes after the appropriate profit is added.


B-1. Profit-split method – PSM

The trading of third party transactions are guided by the average annual profit, which is used to calculate the transfer price of the affiliated enterprise.


B-2. Transactional net margin method – TNMM

The transactional net profit method may also be referred to as the comparable net profit margin Method–CNMM, which compares the net profits of related and non-related transactions of the same enterprise to calculate compliance with ARM's Length Transfer price of principle.

What are the Transfer Pricing services we could provide?


With our professional team, we are able to assist you in preparing the above mentioned Transfer Pricing Documentation. In case you would like to review your Group’s transfer pricing policy and determine if the policy could be accepted by the Inland Revenue Department as in accordance to the arm’s length principle, we are able to prepare a simple benchmarking report for your reference. The report could be presented to the Inland Revenue Department as the effort of taxpayers to prove its fair pricing policy.

For further information, please contact 展群CK ®:
a. Phone at (852) 3502 7392
b. WhatsApp at (852) 5227 9242
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