Is your business prepared for Hong Kong’s rapidly evolving tax dispute landscape? As global tax reforms converge with digital administration initiatives, companies operating in Hong Kong face unprecedented scrutiny and complexity. From the implementation of BEPS 2.0 Pillar Two to enhanced transfer pricing enforcement and digital tax portals, understanding these trends is no longer optional—it’s essential for effective tax risk management and business continuity.

BEPS 2.0 Pillar Two: The New Frontier in Tax Disputes

On June 6, 2025, Hong Kong gazetted the landmark Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Ordinance 2025, implementing Pillar Two of the OECD’s BEPS 2.0 initiative. This legislation fundamentally changes the international tax landscape, introducing a 15% global minimum tax that affects multinational enterprise (MNE) groups with annual consolidated revenue of €750 million or more.

Implementation Timeline and Key Components

Emerging Dispute Areas Under Pillar Two

The implementation of Pillar Two introduces several new areas for potential tax disputes that businesses must navigate carefully:

• Effective Tax Rate Calculations: Complex determinations involving adjustments and allocations across multiple jurisdictions
• Covered Tax Computations: Disputes over what taxes qualify as “covered taxes” under the GloBE rules
• Jurisdictional Blending: Issues arising from calculating top-up tax on a jurisdictional basis for groups with multiple entities
• Transitional Safe Harbours: Application and interpretation of transitional Country-by-Country Reporting safe harbours
• Cross-Border Allocation: Disputes regarding allocation of top-up tax across different jurisdictions

Digital Tax Administration: The E-Filing Revolution

In July 2025, the IRD launched three interconnected electronic portals that fundamentally transform how taxpayers interact with the tax authority. This digital transformation creates both opportunities and challenges for dispute resolution.

Mandatory E-Filing Timeline

1. 2025: Mandatory e-filing for multinational corporations begins
2. 2030: Mandatory e-filing extended to all taxpayers
3. April 2026: Full adoption of electronic Block Extension Scheme for tax representatives (year of assessment 2025/26 onwards)

Transfer Pricing Disputes: Escalating Scrutiny

Hong Kong has witnessed an unprecedented surge in transfer pricing disputes in recent years. The IRD has notably escalated its enforcement of transfer pricing regulations, driven by bilateral considerations and mounting pressure from competent authorities worldwide. Large multinational taxpayers are no longer the only targets—small and medium-sized enterprises and even tax-exempt charities are now under increased scrutiny.

Common Pitfalls Leading to Disputes

• Insufficient Comparability Analysis: Inadequate identification and analysis of comparable uncontrolled transactions
• Weak Economic Substance: Misalignment between claimed functions and actual substance in Hong Kong
• Inconsistent Positions: Contradictions between Hong Kong tax returns, group transfer pricing policies, and positions taken in other jurisdictions
• Inadequate Documentation: Missing or incomplete Master Files and Local Files
• Failure to Demonstrate Benefit: Inability to demonstrate actual benefit received from intra-group services

Mutual Agreement Procedure (MAP): Resolving Cross-Border Disputes

Under BEPS Action 14, Hong Kong has committed to implementing minimum standards to strengthen the effectiveness and efficiency of the Mutual Agreement Procedure (MAP). MAP is included in Article 25 of the OECD Model Tax Convention and commits countries to endeavour to resolve disputes related to the interpretation and application of tax treaties.

Hong Kong’s Expanding Treaty Network

Hong Kong has signed comprehensive avoidance of double taxation agreements/arrangements (DTAs) with 45+ jurisdictions, with negotiations ongoing with additional countries. This expanding treaty network broadens the availability of MAP for resolving international tax disputes.

When to Consider MAP

• Double Taxation: A taxpayer faces actual or potential double taxation as a result of taxation in two jurisdictions
• Treaty Interpretation: There is disagreement about the interpretation or application of a tax treaty provision
• Transfer Pricing Adjustments: One jurisdiction makes a transfer pricing adjustment that creates or increases double taxation
• Permanent Establishment Disputes: Disagreement exists over whether a permanent establishment exists or how to attribute profits to it

Advance Pricing Arrangements (APAs): Proactive Dispute Prevention

Hong Kong introduced its APA program in April 2012, with a statutory APA regime implemented in July 2018. An APA determines, in advance of controlled transactions, an appropriate set of criteria for the determination of transfer pricing for those transactions over a fixed period of time. This provides taxpayers with certainty and reduces the risk of future transfer pricing disputes.

Application Thresholds

DIPN 48 establishes application thresholds based on the nature of related-party transactions:

• Purchase and Sale of Goods: HK$80 million per year
• Provision of Services: HK$40 million per year
• Use of Intangible Assets (e.g., royalty): HK$20 million per year

Emerging Trends in Tax Dispute Resolution

1. Increased Audit Activity and Risk-Based Compliance

The IRD has been adopting initiatives to counter BEPS activities and taking a more conservative and stringent approach during reviews. This means Hong Kong taxpayers face enormous pressure to justify their tax filing positions across all business segments—not only large multinationals but also SMEs and tax-exempt charities.

2. Enhanced Data Analytics and Information Exchange

Hong Kong participates in international tax transparency initiatives, including Automatic Exchange of Information (AEOI) and Country-by-Country Reporting (CbCR). These initiatives provide the IRD with unprecedented access to taxpayer data, enabling more targeted and effective audits.

3. Focus on Economic Substance

The IRD increasingly scrutinises whether taxpayers claiming Hong Kong tax benefits have genuine economic substance in the territory. This includes examination of physical presence, qualified employees with appropriate decision-making authority, operating expenditure proportionate to claimed activities, and core income-generating activities.

Practical Strategies for Managing Tax Disputes

Proactive Compliance and Documentation

The foundation of effective dispute management is robust, contemporaneous documentation:

• Transfer Pricing Documentation: Maintain comprehensive, current Master Files and Local Files that accurately reflect business operations
• Tax Technical Files: Document tax positions, including analysis of applicable law, relevant precedents, and technical reasoning
• Substance Documentation: Maintain evidence of economic substance, including records of key personnel, decision-making, and value-creating activities
• Board Minutes and Resolutions: Ensure corporate governance documents support tax positions and business decisions

Engagement with the IRD

Constructive engagement with the IRD can facilitate dispute resolution:

1. Timely Responses: Provide complete, well-documented responses to IRD enquiries within required timeframes
2. Professional Communication: Maintain professional, factual communication focused on technical substance
3. Voluntary Disclosure: Consider voluntary disclosure of errors or uncertain positions before IRD discovery
4. Objection Procedures: Understand and properly utilise Hong Kong’s tax objection and appeal procedures when disputes arise

Hong Kong’s tax dispute resolution landscape is undergoing profound transformation driven by BEPS 2.0 implementation, digital administration advances, and heightened transfer pricing enforcement. Successful navigation of this evolving environment requires proactive compliance, robust documentation, strategic use of dispute prevention mechanisms like APAs, and sophisticated understanding of international dispute resolution frameworks including MAP. As Hong Kong maintains its position as a leading international financial centre while adapting to global tax standards, businesses must remain vigilant in monitoring developments and adapting their tax risk management strategies accordingly.