With the new transfer pricing measures coming into effect in July 2018, taxpayers need to consider a proactive approach to addressing the following issues: China Transfer Pricing 2016 Transfer Prices in China 2016, written by Sowmya Varadharajan in collaboration with Dezan Shira Associates and Asia Briefing, explains how transfer pricing works in China. It examines the different transfer pricing methods available to foreign companies operating in the country, highlights key compliance issues and outlines problems with the transfer pricing system imposed on intercompany services, intercompany fees and intercompany financing. A pre-price agreement (APA) is an agreement that sets an appropriate rate of criteria ahead of controlled transactions to determine the transfer prices of these transactions over a specified period of time. It is an instrument for multinationals that manage and reduce transfer pricing risk on a forward-looking basis. Through these updates to the APA program, DIPN 48 revised provides taxpayers with an improved way to maintain their transfer pricing positions in Hong Kong and the parties` jurisdictions, and can thus help resolve existing controversies with which they face. The revised DIPN 48 reflects the IRD`s commitment to the development of the APP program in Hong Kong. This is a welcome act, given the controversies that have arisen over transfer pricing since the introduction of the OECD Action Plan against the Thieves Market and the Transfer of Profits (BEPS) in international and local contexts. The final APA Adequacy Indicators in the revised DIPN 48 allow subjects to better assess the feasibility of a potential APA before the process begins. The Department of Internal Revenue has set thresholds for the size of an APA application. In other words, if the Hong Kong taxpayer does not meet these thresholds, the Department of Internal Revenue will consider that the transfer pricing risk is not significant enough to be mitigated by an APA. Although the APP regime was introduced in 2012, it reached an important milestone when Hong Kong concluded its first bilateral APA with the Netherlands in September 2014. This bilateral app request was formally submitted to the Hong Kong financial authorities and the Dutch tax authorities in September 2013 and was included in the APP programme by the relevant tax authorities in October 2013. The agreement was effectively concluded within nine months, compared to the 18 to 24 months estimated by the Hong Kong tax authorities for the conclusion of bilateral APA.
The timely manner in which the APA was negotiated and concluded can be explained by the following factors: taxpayers may consider unilaterally entering into APA with the IRD in situations where there is no double taxation agreement or as an alternative to the multilateral APA when transactions with related parties involve many jurisdictions.