On 29 December 2017, a draft bill to implement key actions arising from the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) agenda was gazetted (Inland Revenue (Amendment) (No.6) Bill 2017).
The draft bill is both surprising as well as significant. We already knew from the extensive consultation exercise that there would be significant changes to codify transfer pricing, introduce country-by-country reporting (CbCR), Master File and Local File transfer pricing documentation, expand the Advance Pricing Agreement (APA) regime and introduce a stringent penalty regime with potential civil and criminal sanctions.
However, there are also some surprising developments including:
- The length and complexity of the Bill (at 162 pages it is the largest tax amendment bill that Hong Kong has seen);
- The bill goes significantly beyond the BEPS minimum standards (and the scope of the consultation) and fully adopts the OECD’s BEPS action items on permanent establishment thresholds (in contrast to a large number of other jurisdictions that have opted out of at least some of these developments). This will likely have a knock on effect on the separate amendment bill to introduce the BEPS multilateral agreement expected in mid-2018; and
- The absoluteness in approach to determining “the” arm’s length price, which places a significant burden of proof on the taxpayer, and makes the IRD assessor the sole arbiter of whether the profit or loss in the return is correct. This does not appear to fully recognise that there may legitimately be a range of possible arm’s length prices.