By Summer Ha, Manager, Tax Services and Jennifer Chong, Associate Tax Director, Tax Solutions and Services
Transfer pricing (TP) has become a focal point for tax authorities globally and Hong Kong is no exception. The Hong Kong Inland Revenue Department (HK IRD) increasingly expects TP governance to reflect actual business operations, not just formal documentation. The shift underscores the need for businesses to align pricing with commercial reality, giving regulators confidence in their tax positions.
Why TP matters in Hong Kong
The business impact is clear: non-compliance with TP rules can result in tax adjustments, penalties and prolonged audits. Conversely, robust TP documentation serves as your primary audit defence and demonstrates governance transparency to tax authorities.
Since the introduction of statutory TP rules in April 2018, Hong Kong has aligned itself with Organisation for Economic Co-operation and Development (OECD) standards. At its core is the arm’s length principle: transactions between related parties must be priced as if they were conducted between independent parties under comparable conditions. This fundamental requirement ensures that Hong Kong’s tax base is protected and that profits are reported where genuine economic value is created.
TP rules apply to all entities engaged in related party transactions (RPTs), including multinational groups, regional headquarters, branches and family-owned enterprises. If your business or family office deals with related parties, you must comply with TP rules.
Transfer pricing documentation (TPD)
Under Section 58C of the Inland Revenue Ordinance (IRO), Hong Kong entities engaging in controlled transactions are required to prepare contemporaneous documentation, specifically:
- Master file
- Local file
This documentation provides HK IRD with clear and reliable information to assess whether your TP practices are reasonable and to identify any potential TP risk efficiently.
Contents of TP documentation
The TP documentation must provide a comprehensive overview of the group and its Hong Kong entity:
Master file
- Overview of the group structure
- Overview of the group business
- Description of key value drivers and intangibles
- Summary of intercompany financing arrangements
- Group’s financial and tax positions
Local file
- Description of the Hong Kong entity
- Details of controlled transactions
- Functional, assets and risk (FAR) analysis
- Selection and application of TP methods
- Financial data and benchmarking analyses
- Copies of relevant intercompany agreements
TPD deadline
Businesses must prepare the Master File and Local File within nine months after the end of the accounting period unless subject to exemptions.
Taxpayers must also declare in their Profits Tax Return whether they have engaged in controlled transactions and whether they are required to prepare the Master and Local Files.
TPD submission
The documentation must be retained for at least seven years and made available to HK IRD upon request. In practice, HK IRD may conduct desk-based reviews within six months after profits tax returns filing, assessing whether the documentation is prepared on time, complete and in compliance with the rules.
Penalties
Failure to prepare or retain the required documentation may lead to penalties under Section 80(2Q) of the IRO, which fines up to HK$50,000. The court may also order the business to prepare such documentation within a specified time.
TP methods and benchmarking
To demonstrate arm’s length pricing, businesses should perform a benchmarking study or comparability analysis to assess whether their pricing aligns with what independent parties would agree under similar circumstances.
The principle applies to a wide range of transactions, including:
- Sale or purchase of goods
- Provision or receipt of services
- Intercompany loans or financial guarantees
- Use or transfer of intangibles
- Lease or use of movable or immovable property
Depending on the type of transaction, acceptable TP methods include:
- Comparable uncontrolled price (CUP)
- Resale price method (RPM)
- Cost plus method (CPM)
- Transactional net margin method (TNMM)
- Profit split method (PSM)
Benchmarking helps demonstrate that the agreed price is fair and defensible if reviewed by the tax authorities.
TPD exemptions
To balance compliance and administrative burden, HK IRD provides exemptions from preparing the Master and Local Files.
Business size exemption
A Hong Kong entity is exempt if it satisfies any two of the three conditions in a basis period:
- Total annual revenue < HK$400 million
- Total assets value < HK$300 million
- Average number of employees < 100
RPTs threshold exemption
Local file is not required for categories of transactions below these thresholds:
- Transfers of properties (whether movable or immovable but excluding financial assets and intangibles) < HK$220 million
- Transactions involving financial assets < HK$110 million
- Transfer of intangibles < HK$110 million
- Any other transactions (services, leases, guarantees) < HK$44 million
If the total amount of each type of transaction does not exceed the above threshold, there is no requirement to prepare a Master file and a Local file.
Exemption of specified domestic transactions
Master and Local files need not be prepared for domestic transactions between Hong Kong associated entities if the conditions are met.
Important: Even if transactions fall under exemptions, businesses must still ensure that related party transactions are conducted at arm’s length and be able to substantiate the basis if queried by HK IRD.
Turning compliance into strategic clarity
TP is not merely about documentation; it is about managing risk and demonstrating transparency. HK IRD continues to tighten enforcement and businesses that assume they fall under exemptions may still face pricing reviews.
With practical, well-structured TP policies and documentation, businesses can confidently demonstrate alignment between pricing, operational substance and value creation. A proactive TP framework (policy and documentation) is essential and supports:
- Avoiding TP adjustments and penalties
- Demonstrating robust governance and transparency to tax authorities
- Supporting sustainable business growth whilst minimising disputes
As businesses expand into new markets or review their related party arrangements, having a robust TP policy and benchmarking strategy becomes essential – not just for compliance, but for competitive advantage.
How we can help
Our IQ-EQ expert tax team in Hong Kong can strengthen your TP documentation and help you gain business advantage from compliance. We provide comprehensive, practical solutions including:
- TP policy design: Develop and align group TP policies with OECD and IRD standards
- TP documentation compliance: Prepare contemporaneous Master file and Local file documentation, regional TP documentation to meet TP requirements
- TP impact assessment: Review intercompany arrangements, identify risk gaps and recommend practical enhancements
- TP benchmarking: Perform analysis and provide full search write-up with benchmarking analysis
- Advance pricing arrangements (APA) and dispute support: Assist with APA applications, TP audits and dispute resolution
Ready to transform your transfer pricing approach? Reach out to your IQ-EQ representative or get in touch for tailored guidance and implementation support.
