Operating across Hong Kong and Mainland China presents multinational enterprises with a complex transfer pricing landscape. While both jurisdictions follow OECD BEPS principles, their implementation, enforcement, and compliance requirements differ significantly. Understanding these differences is crucial for avoiding double taxation, minimizing penalties, and ensuring smooth cross-border operations. This comprehensive guide breaks down the key compliance differences you need to navigate successfully.

Regulatory Framework Foundations

The legal foundations of transfer pricing in Hong Kong and Mainland China reflect their different tax systems and policy objectives. Hong Kong’s territorial tax system contrasts with China’s worldwide taxation approach, creating distinct compliance environments.

Hong Kong’s Transfer Pricing Framework

Hong Kong’s transfer pricing regime represents a significant modernization of its tax code. The Inland Revenue (Amendment) (No.6) Ordinance 2018 introduced Part 8AA to the Inland Revenue Ordinance with two primary rules:

• Section 50AAF (Transfer Pricing Rule 1): Requires arm’s length pricing for transactions between associated persons, applicable from 2018/19 assessment year
• Section 50AAK (Transfer Pricing Rule 2): Governs profit attribution to permanent establishments in Hong Kong, applicable from 2019/20 assessment year

The Inland Revenue Department (IRD) published three critical Departmental Interpretation and Practice Notes (DIPNs) on July 19, 2019, which remain the primary guidance documents:

• DIPN 58: Transfer Pricing Documentation requirements
• DIPN 59: Transfer Pricing between Associated Persons
• DIPN 60: Attribution of Profits to Permanent Establishments

China’s Transfer Pricing Framework

China’s transfer pricing legislation is more mature and complex, having evolved over nearly two decades. The framework includes multiple layers of regulations:

• Corporate Income Tax Law (2007) Part 6: Establishes fundamental transfer pricing principles
• SAT Bulletin [2009] No. 02: Implementation Measures of Special Tax Adjustments (Guoshuifa)
• SAT Bulletin [2016] No. 42: Enhancement of Related Party Transaction Declaration and Contemporaneous Documentation Administration
• SAT Bulletin [2016] No. 64: Country-by-Country reporting requirements
• Various Notices: Ongoing guidance from the State Taxation Administration

Documentation Requirements Comparison

Both jurisdictions follow the OECD’s three-tiered documentation approach, but the implementation details differ significantly in thresholds, deadlines, and language requirements.

Hong Kong Exemption Thresholds

A Hong Kong entity is exempt from preparing Master File and Local File if it satisfies any two of the following three conditions:

• Total revenue does not exceed HK$400 million
• Total value of assets does not exceed HK$300 million
• Average number of employees does not exceed 100

China Local File Preparation Thresholds

Chinese entities must prepare a Local File if related-party transactions exceed the following annual thresholds:

• RMB 200 million (approximately USD 27.6 million): Transfer of ownership of tangible assets
• RMB 100 million (approximately USD 13.8 million): Transfer of financial assets
• RMB 100 million (approximately USD 13.8 million): Transfer of ownership of intangible assets
• RMB 40 million (approximately USD 5.5 million): Other related-party transactions

Domestic Transaction Treatment

Hong Kong’s Section 50AAJ Domestic Exemption

Hong Kong provides a specific exemption for certain domestic transactions under Section 50AAJ(2) of the IRO. Domestic transactions are excluded from transfer pricing requirements if all three conditions are met:

1. Domestic Nature: The actual provision relates to a trade, profession, or business carried out in Hong Kong by both related persons
2. No Actual Tax Difference or Non-Business Loan: Either:
   • The income generated from the transaction is taxed in Hong Kong for both parties, OR
   • The transaction relates to interest-free loans not in the ordinary course of money lending or intra-group financing business
3. No Tax Avoidance Purpose: The key purpose of the provision is NOT to use losses of any related person to reduce Hong Kong tax liability

China’s Domestic Transaction Treatment

China does not provide a comprehensive exemption for domestic transactions. All related-party transactions, whether domestic or cross-border, are subject to transfer pricing scrutiny if they meet documentation thresholds or raise tax authority concerns.

Country-by-Country Reporting

Advance Pricing Arrangement (APA) Programs

Hong Kong APA Program

Hong Kong introduced its APA program in 2012, providing taxpayers with a transparent mechanism to achieve tax certainty on related-party transactions.

• Unilateral APA: Agreement solely between Hong Kong taxpayer and the IRD Commissioner. Unilateral APAs are accepted for transactions with jurisdictions where Hong Kong has no Double Taxation Agreement (DTA).
• Bilateral APA: Arrangement involving the IRD and relevant tax authorities in foreign jurisdictions with DTAs with Hong Kong
• Multilateral APA: Involving three or more tax jurisdictions

China APA Program

China has a well-established APA program with significant activity. According to the State Taxation Administration’s reports:

• Total APAs signed (2005-2023): 296 (153 unilateral, 143 bilateral)
• 2023 APAs signed: 36 (9 unilateral, 27 bilateral)
• 15 consecutive years of publishing annual APA reports demonstrating transparency

Penalties and Enforcement

Hong Kong’s Reasonable Effort Principle

Under Section 82A of the IRO, proper transfer pricing documentation serves as evidence that an enterprise made reasonable efforts to determine the arm’s length amount. If the IRD makes adjustments despite these reasonable efforts, the enterprise will not be liable for additional tax of up to 100% of the tax undercharged.

Recent Regulatory Updates and 2025 Developments

Hong Kong – Global Minimum Tax Implementation

The Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Ordinance 2025 was enacted on June 6, 2025, with key provisions:

• Implements OECD’s global minimum tax of 15% on MNE groups with annual consolidated revenue of EUR 750 million or above
• Effective from January 1, 2025
• Includes Income Inclusion Rule (IIR) and Hong Kong Minimum Top-up Tax (HKMTT)
• Updates Hong Kong’s transfer pricing rules to align with the 2022 OECD Transfer Pricing Guidelines

China – Enhanced Digital Enforcement

2025 marks a new era of stricter enforcement in China, characterized by:

• Digitization: Integration of AI and machine learning in audit selection and risk assessment
• Data-driven audits: Cross-referencing of multiple data sources (tax filings, customs declarations, foreign exchange records, CbC reports)
• Real-time monitoring: Advanced systems for identifying transfer pricing anomalies as transactions occur
• Focus areas: Cross-border supply chains, intellectual property structures, cost-sharing arrangements, intra-group financing

Strategic Compliance Considerations

For multinational enterprises operating in both jurisdictions, these strategic considerations are essential:

1. Harmonize Documentation Approaches: Prepare comprehensive global documentation that satisfies both jurisdictions’ specific requirements while maintaining consistency
2. Leverage Hong Kong’s Domestic Exemption: Structure Hong Kong-only operations to potentially qualify for documentation exemptions under Section 50AAJ
3. Monitor China’s Loss-Making Entity Rules: Single-function entities in China must prepare Local Files if showing losses, regardless of transaction thresholds
4. Plan for Different Deadlines: Coordinate documentation preparation to meet Hong Kong’s 9-month deadline and China’s June 30 deadline
5. Consider APA Programs Strategically: Leverage bilateral APAs with DTA partners in Hong Kong; utilize simplified unilateral APA procedures in China
6. Prioritize Documentation Quality: In Hong Kong, documentation provides protection from additional tax; in China, it waives penalties and reduces audit scrutiny
7. Prepare for Enhanced China Enforcement: Robust substantiation of commercial rationale and value chain alignment is essential
8. Language and Format Compliance: Hong Kong accepts English or Chinese; China requires Chinese documentation
9. Retention and Accessibility: Hong Kong: 7 years minimum; China: 10 years mandatory retention
10. Stay Updated on Minimum Tax Impacts: Hong Kong’s implementation of OECD Pillar Two affects large MNE groups from 2025

Navigating the transfer pricing landscape between Hong Kong and Mainland China requires careful attention to their distinct compliance requirements. While both jurisdictions follow OECD principles, their implementation differences create unique challenges for multinational enterprises. By understanding these differences and implementing strategic compliance approaches, businesses can minimize risks, avoid penalties, and ensure smooth cross-border operations. Regular consultation with qualified tax professionals familiar with both jurisdictions is essential for maintaining compliance in this evolving regulatory environment.