On 15 July 2020, the Inland Revenue Department (IRD) released the revised Departmental Interpretation and Practice Notes No. 48 (Revised DIPN 48). The revision (click here) mainly serves to: (a) reflect the legislative changes made by the Inland Revenue (Amendment) (No. 6) Ordinance 2018 in relation to the statutory advance pricing arrangement (APA) regime in Hong Kong; and (b) explain the streamlined APA process.


Key revisions in DIPN 48 include the following:

  • Unilateral APA: Unilateral APA applications are now accepted – this is to provide certainty for related party transactions with jurisdictions which Hong Kong has no double tax agreement (DTA).
  • APA Rollback: Requests for rollback of transfer pricing methodology under bilateral and multilateral APAs can be considered. This provides a means of resolving collateral issues and reduces the overall time needed for the APA process. The rollback option also helps to manage historical risk in that tax audits / TP inquiries from prior years may be resolved with less penalty pressure.
  • Streamlined APA Process: The APA process has been streamlined from the original 5-stage process to a 3-stage process, namely: (i) Stage 1: Early engagement; (ii) Stage 2: APA application; and (iii) Stage 3: Monitoring and compliance. The level of documentation required at the early stage has also been reduced. These overall revisions aim to improve the timeliness and efficiency of processing APA applications. 
  • Application to Permanent Establishments and Other Transactions: The coverage of APAs has been extended to include the attribution of profit to a permanent establishment in Hong Kong (with a threshold of HK$20 million business profits per annum) as well as transactions other than the sale or purchase of goods, provision of services and use of intangible properties (with a threshold of HK$20 million per annum).
  • APA Fees: Further guidance is provided regarding the fee payable for an APA application, including the provision of a fee estimate by any independent expert from whom the IRD would like to seek assistance. This enables taxpayers to better quantify the potential costs involved and accordingly decide whether the APA application should be proceeded with or not. 
  • Other Considerations: Considerations as to when a taxpayer should enter an APA and when the IRD will prioritize an APA application are also provided. 

Summary of the 3-stage APA process 

Summary of the 3-stage APA process

KPMG Observations

The Revised DIPN 48 reflects the IRD’s commitment to further developing the APA program in Hong Kong. This is a welcome act given the significant increase in transfer pricing controversies internationally as well as locally since the OECD’s action plan against Base Erosion and Profit Shifting (BEPS) was introduced. The indicators provided in the Revised DIPN 48 with respect to suitability of concluding APAs allow taxpayers to better evaluate the feasibility of a potential APA before initiating the process. 

With these updates to the APA program, the Revised DIPN 48 offers taxpayers an improved avenue to lock in their transfer pricing positions in Hong Kong and counterparty jurisdictions and can thereby help to resolve any existing controversies with which they are dealing. 

Where required, taxpayers should seek professional advice during this process to ensure an all-rounded assessment is conducted.