经合组织修订的利润分配方法和香港定价转让格局
With the increasing complexity in the operating environment for multinational enterprises (MNEs), collecting corporate taxes has become a challenging task for most tax authorities. With more attention focused on reshaping and aligning with the international tax regulatory landscape, the Hong Kong Inland Revenue Department (IRD) issued its transfer pricing (TP) regulations through The Inland Revenue Ordinance (Amendment) (No. 6) 2018 (Amendment Bill No.6), enacted on 13 July. The general direction and focus of the Hong Kong TP regulations primarily follows and emulates the arm's length principle and TP approaches issued by the Organization for Economic Cooperation and Development (OECD) in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP guidelines) issued in July 2017..
In June, the OECD published its final Revised Guidance on the Application of the Transactional Profit Split Method (the revised guidance) to provide clarity around the practical application of the profit split method between associated enterprises. Work on the revised guidance was initiated as part of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan, which attempts to clarify today's multifaceted cross-border transactions between related enterprises as global value chains have grown increasingly complicated.
Since TP legislation is fairly new in Hong Kong, this article explores the potential impact of the revised guidance on MNEs operating in Hong Kong and analyses whether the application of the revised guidance could provide a breath of fresh air to Hong Kong's business environment.
Recent transfer pricing development
In response to the global downturn, Hong Kong businesses revamped their operational structure, designed new and innovative services, and transformed the research and development (R&D) environment to improve their competitive advantage. Additionally, the Hong Kong government introduced various incentives to attract and support R&D with the aim of increasing these activities as a percentage of gross domestic product. Together, these changes are an attempt to strengthen Hong Kong's services and retail industries, to advance theminto a high-value added status, and to ensure Hong Kong to remain as an integral part of global economic value chain.
Overview of Hong Kong transfer pricing landscape
The Amendment Bill No. 6 is to be administered meticulously in accordance with the OECD TP guidelines, and aligns Hong Kong's regulatory standard with that of OECD countries. It is expected that Hong Kong will also apply the revised guidance on the profit split method issued by OECD. Based on how the OECD TP guidelines and the revised guidance delineate the functions and risks analysis in inter-company transactions, taxable profit is attributable to entities that develop, enhance, maintain, protect or exploit (DEMPE) the economic rights of intellectual property (IP). This is of special interest, and concern, to the Hong Kong MNE community because the Amendment Bill No. 6 also incorporates this specific OECD stipulation on how to police the DEM PE functions of intra-firm intangible transactions. This deeming provision, which is effective from years assessment beginning on or after 1 April 2019, targets income derived by a non-Hong Kong resident from IP to which its Hong Kong associate creates and owns the economic rights to such IP. While it is still unclear how the IRD would handle this new deeming provision, Hong Kong enterprises with closely connected business to their MNE groups ought to re-evaluate their TP positions and approaches.
Overview of the revised profit split method
Selection criteria of profit split method
Unlike the previous version of the OECD profit split method, the revised guidance clearly aims to identify profits (or losses) generated from economic activities of MNEs and where value is created. The general purpose of applying the revised method is to establish the arm's-length principle in transactions between associated enterprises, with reference
to the value contributions of each party. The revised guidance provides clarity on; the definition and application of the profit split method, all the while maintaining th.e central theme of the OECD TP framework - the arm's-length principle. The revised guidance showcases three new factors indicating the selection criteria of the profit split method:
- Whether the unique and valuable
- Whether the business operations of
- Whether the associate parties share