This article was first published in the June 2012 China edition of Accounting and Business magazine.

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The release of the Departmental Interpretation and Practice Notes No. 48 (DIPN 48) by the Hong Kong Inland Revenue Department (IRD) on 29 March 2012 marked the launch of the Advance Pricing Arrangement (APA) programme in Hong Kong. This was officially rolled out on 2 April 2012. This article examines the prominent features of DIPN 48, and highlights the potential opportunities and challenges for taxpayers seeking to explore the APA programme.

Scope of programme

The APA programme offers an opportunity for Hong Kong taxpayers to seek and conclude a binding agreement with the IRD, and one or more tax authorities of different jurisdictions, on the transfer pricing methodology to be adopted for a specified set of related-party transactions over a fixed period of time, usually on a prospective basis. The authority and administrative power of the IRD to conclude an APA with the tax authority of another jurisdiction is provided under the Mutual Agreement Procedure (MAP) article in the double tax agreements/arrangement (DTA) concluded between Hong Kong and the DTA countries. Hence, while the APA programme is available for Hong Kong taxpayers – which includes a Hong Kong resident corporation and a non-resident corporation with permanent establishment (e.g. a branch) in Hong Kong chargeable to profits tax – the related party with whom the Hong Kong taxpayer transacts must be located in a country that has concluded a DTA with Hong Kong incorporating a MAP article.

The APA programme primarily covers bilateral APAs (with one other foreign tax authority) and multilateral APAs (with two or more foreign tax authorities). While it is a voluntary exercise and applications are made at the initiative of the Hong Kong taxpayer, DIPN 48 has established application thresholds, based on the nature of the related-party transaction to be covered by the APA, as follows:

  • HK$80m per year for purchase and sale of goods.
  • HK$40m per year for provision of services.
  • HK$20m per year for the use of intangible assets (e.g. royalty).

An APA in Hong Kong will normally cover a period of three to five years, and the taxpayer may seek for a renewal to cover another three to five years, but at least six months before the expiration of the original APA. While DIPN 48 envisages the estimated timeframe for concluding an APA to be 18 months, from our experience, the process could take longer (e.g. two years or more), especially if there are prolonged mutual negotiations between the relevant tax authorities.

DIPN 48 sets out seven distinct steps of the Hong Kong APA process, which are shown in the table overleaf.

The pre-filing meetings can be held on an anonymous basis, and the IRD will not charge a fee for processing the APA application.

Collateral issues and resolution

During the initial stage of the APA process, the IRD may identify collateral issues pertaining to an APA application that are required to be resolved in order to conclude an APA. Collateral issues are defined broadly in DIPN 48, and include any material issues pertaining to legal and tax matters that appear alongside the related-party transactions in question. For collateral issues such as tax anti-avoidance under sections 61 and 61A of the Inland Revenue Ordinance (IRO), and non-arm’s-length transactions with closely connected non-residents under section 20 of the IRO, taxpayers will need to submit an advance ruling request to the IRD to resolve these issues first.

The apparent intention of the IRD is to prevent taxpayers from using the APA programme to set up tax avoidance schemes. Hence if the IRD is unable to give a positive ruling on the collateral issues in question, it may withdraw from the APA process.

Opportunities and challenges

While the APA programme offers opportunities for taxpayers to obtain certainty on their transfer pricing position, there are also associated challenges that they should be aware of before engaging in an application.


  • Certainty for tax risk management
    In view of the increasing number of DTAs concluded by the IRD, the Hong Kong APA programme can offer certainty to multinational corporations (MNCs) on their transfer pricing position during the defined APA period, thereby achieving effective management and certainty on the material tax position of the MNCs.

  • Minimises risk of tax audit and double taxation  Traditionally, Hong Kong has been the preferred jurisdiction for MNCs to conduct inter-company transactions with China affiliates, or to set up an Asian hub (e.g. principal operating company) for operational and tax efficiencies. The lack of DTAs and APA process in the past had exposed MNCs to extensive tax audits on transfer pricing issues in the overseas countries, without any resort for initiating MAP in Hong Kong to counter/mitigate double taxation issues. With the launch of the APA programme in Hong Kong, MNCs are now provided with the opportunity to negotiate and conclude a binding agreement with the IRD and the foreign tax authority(ies) on related-party transactions, based on the arm’s-length principle, to allocate profits between the group companies, on a prospective basis.

  • Prospective and retrospective resolution of transfer pricing issues  DIPN 48 indicates that a taxpayer currently under transfer pricing audit may also apply for an APA in respect of future years. If the IRD considers that the APA application is relevant to the transfer pricing issues under audit (i.e. the APA conclusion may contribute to the resolution of the underlying transfer pricing disputes), the tax audit may be held in abeyance pending conclusion of the APA. On conclusion of the APA, the taxpayer may seek to apply the agreed transfer pricing methodology under the APA to settle the outstanding transfer pricing audit.


  • Unilateral APA applications are not accepted Currently the APA programme is open only to bilateral and multilateral APA applications. Historically, taxpayers having related-party transactions with affiliates in non-DTA countries could seek a unilateral APA from the IRD by way of an advance ruling. However, it is our observation that advance rulings on transfer pricing cases have so far covered relatively straightforward related-party transactions (e.g. inter-company service fees at a cost plus mark-up basis). Hence, taxpayers with complicated related-party transactions with an affiliate located in a non-DTA country would not be in a position to utilise the new APA programme immediately.

  • Collateral issues could be detrimental to the APA  If the IRD places excessive focus on collateral issues such as section 61/61A of the IRO and withdraws from the APA, it will negate the good intention of the programme in promoting APA negotiation/conclusion. Furthermore, inclusion of section 20 as a collateral issue would seem counter intuitive. The purpose of an APA is to provide taxpayers with the opportunity to ascertain and agree the arm’s-length transfer price for related-party transactions, which would normally come within the ambit of section 20 of the IRO. If a taxpayer has to first obtain a successful advance ruling on section 20 before being able to proceed, it means that the taxpayer would have to secure a unilateral APA on the related-party transactions before concluding an APA. With the need for a taxpayer to reach agreement with the IRD on both the transfer pricing matters and the collateral issues, the APA process will become overly complicated and lengthy.

  • No guarantee that prior years’ tax position will not be subject to audits DIPN 48 clearly states that the IRD, in concluding an APA with a taxpayer, will not refrain from auditing the same transfer pricing issues of the taxpayer in prior years. Hence, if transfer pricing risks in the past are identified during the course of the APA process, it is possible that the IRD may roll back the principles reached in the APA and impose transfer pricing adjustments to the taxpayer’s prior years tax returns.

Closing comments

The Hong Kong APA provides a good channel for taxpayers to manage their transfer pricing position and maximise the benefits available under the various DTAs to support inbound and outbound investments. To avail the potential benefits, taxpayers are advised to review their significant related-party transactions and transfer pricing positions, and if necessary seek professional input on the consideration of an APA application.

Swipe to view table

  Activity Documents required Timing
APA proposal Submit APA proposal. APA proposal. At least one month before pre-filling meeting.
Pre-filing meeting Meet with IRD to discuss APA proposal. If IRD agrees to move forward, IRD will invite taxpayer to submit APA application. APA case plan and collateral issues. At least six months before start of APA.
APA application Submit formal APA application and advance ruling request to deal with collateral issues, if necessary. APA application to IRD (and parallel application to DTA partner). 18 to 24 months; longer for complex cases.
Analysis / evaluation IRD to evaluate APA application, request additional information, obtain expert opinions, resolve collateral issues. Additional information at request of IRD. 18 to 24 months; longer for complex cases.
Negotiation / agreement IRD to negotiate terms with DTA partner and consult with taxpayer; adapt to unilateral APA if MAP fails. Application for MAP procedure. 18 to 24 months; longer for complex cases.
Drafting / execution On conclusion of MAP, IRD to prepare for execution by taxpayer. Execute and return APA letter to IRD. As above.
Monitoring and renewal Taxpayer to submit annual compliance reports showing compliance with APA terms, and comp adjustment, if any. Annual compliance report, apply for renewal six months before expiration. Three to five years.

Philip Wong is transfer pricing partner and Petrina Chang is transfer pricing director of Deloitte Hong Kong