Are your Hong Kong operations priced correctly in the global marketplace? With multinational enterprises facing increasing scrutiny from tax authorities worldwide, conducting a robust transfer pricing benchmarking study is no longer optional—it’s essential for compliance and risk management. Hong Kong’s territorial tax system, combined with evolving international standards, creates unique challenges and opportunities for businesses operating in Asia’s financial hub. This comprehensive guide walks you through every step of conducting a defensible transfer pricing benchmarking study specifically tailored for Hong Kong operations.

Understanding Hong Kong’s Transfer Pricing Landscape

Hong Kong’s transfer pricing framework is integrated into the Inland Revenue Ordinance (IRO) and closely aligns with OECD principles, particularly following the Base Erosion and Profit Shifting (BEPS) initiative. The arm’s length principle is central to this framework, requiring that transactions between related entities mirror those between independent enterprises under comparable circumstances. This ensures profits are appropriately allocated based on functions performed, risks assumed, and assets utilized.

Hong Kong’s Unique Tax Context

Hong Kong operates a two-tiered profits tax system introduced in 2018/19. For the 2024-25 tax year, corporations pay 8.25% on the first HK$2 million of assessable profits and 16.5% on the remainder. Unincorporated businesses pay 7.5% on the first HK$2 million and 15% on the remainder. Only one entity per connected group can claim the lower tier. This system, combined with Hong Kong’s territorial basis of taxation, creates specific considerations for transfer pricing analysis.

Step 1: Define Scope and Conduct Functional Analysis

Before diving into external comparisons, you must clearly define your study’s scope and perform a detailed functional analysis. This involves mapping all intercompany transactions involving your Hong Kong entity and understanding its operational role within the multinational structure.

The F.A.R. Framework

The functional analysis examines Functions performed, Assets employed, and Risks assumed (F.A.R.) by your Hong Kong entity and its related parties:

1. Identify the Tested Party: Select the entity for which external comparable data is most readily available, typically the party performing less complex functions and bearing fewer risks.
2. Choose Profit Level Indicators (PLIs): Select appropriate financial metrics like operating margin, gross margin, or return on assets based on the tested party’s profile.
3. Determine Value Drivers: Identify who controls significant risks and makes strategic decisions that drive profitability.

Step 2: Select Comparable Companies and Data Sources

The credibility of your benchmarking study depends on meticulous selection of comparable companies and reliable data sources. Establish rigorous search criteria to identify companies operating under similar economic circumstances and business activities.

Making Necessary Adjustments

After identifying potential comparables, perform adjustments to enhance comparability:

• Currency Conversion: Convert foreign comparables’ financial results to Hong Kong dollars using appropriate historical exchange rates
• Working Capital Adjustments: Consider differences in accounts receivable, inventory, and accounts payable levels
• Operational Differences: Account for variations in business models, market conditions, and economic cycles

Step 3: Analyze Results and Establish Arm’s Length Range

With comparable data compiled, calculate Profit Level Indicators (PLIs) and establish your arm’s length range using statistical methods.

1. Calculate PLIs: Compute operating margin, return on assets, or Berry ratio for each comparable company
2. Apply Interquartile Range: Order PLIs from lowest to highest and identify 25th and 75th percentiles
3. Validate Economically: Assess industry trends, market conditions, and economic factors influencing profitability

Hong Kong-Specific Regulatory Requirements

Hong Kong’s Inland Revenue Department (IRD) has specific transfer pricing documentation requirements aligned with OECD BEPS Action 13 standards. Understanding these local requirements is crucial for compliance.

Global Minimum Tax Implications

Hong Kong enacted Pillar Two global minimum tax legislation on June 6, 2025, effective from January 1, 2025. This imposes a 15% minimum effective tax rate on multinational enterprise groups with consolidated revenue of €750 million or more. Your transfer pricing strategy must consider how these rules interact with Hong Kong’s territorial tax system and two-tiered profits tax rates.

Managing Disputes and Future-Proofing Your Strategy

Even with meticulous preparation, disputes may arise. Be prepared with comprehensive documentation and understand available resolution mechanisms.

• Mutual Agreement Procedures (MAPs): Use double tax treaties to resolve disputes between jurisdictions
• Compensating Adjustments: Implement post-year-end adjustments to align with arm’s length range
• Periodic Reviews: Revisit benchmarking studies annually or after significant corporate events

Hong Kong’s Double Taxation Agreements

Hong Kong has comprehensive double taxation agreements (CDTAs) with over 45 jurisdictions, including Mainland China, Singapore, the UK, and Japan. These agreements provide mechanisms for resolving transfer pricing disputes and avoiding double taxation through MAP procedures.

Conducting a robust transfer pricing benchmarking study for Hong Kong operations requires careful planning, meticulous execution, and ongoing maintenance. By following these steps and staying informed about evolving regulations—including Hong Kong’s implementation of global minimum tax rules—you can ensure compliance, mitigate audit risks, and establish defensible transfer pricing positions that reflect the economic substance of your intercompany arrangements. Remember that transfer pricing is not a one-time exercise but an ongoing process requiring regular review and adjustment as business models, market conditions, and regulatory landscapes evolve.