The Hong Kong Inland Revenue Department has announced the update of its webpage on penalty policy. This update concerns punitive actions under Part 14 of the Inland Revenue Ordinance in relation to relief from double taxation, exchange of information, transfer pricing requirements, advance pricing arrangement (APA), mutual agreement procedure (MAP) and arbitration, etc. Depending on the nature of the offense, penalties include fines of HKD 10,000 or HKD 50,000, further fines of up to treble the amount of the tax undercharged, and possible imprisonment for up to three years.
The update also includes the Department's penalty policy for transfer pricing cases, which includes the assessment of additional tax based on the difference between the amount of income/loss declared in the return and the assessed arm's length amount. The scale of the penalty to be imposed on a person is a function of the nature of transfer pricing treatment and the efforts spent to determine the arm's length amount. For this purpose, a penalty loading table is used that may result in higher, lower, or even nil additional tax penalties as follows:
In general, a person is considered to have made reasonable efforts to have a documented transfer pricing treatment if, objectively considering the person's risk of not complying with the arm's length principle, and taking account of the person's relative resources, the person has taken all reasonable steps, in the particular facts and circumstances. Further information on the reasonable efforts test can be found in the Departmental Interpretation and Practice Notes No. 59 – Transfer Pricing Between Associated Persons.
The penalty policy for transfer pricing cases also notes aggravating factors that may result in an upward penalty adjustment of up to 25%, such as delaying or obstructing the progress of a transfer pricing examination. Mitigating factors are also included that may result in a downward penalty adjustment of up to 25%, such as voluntarily informing the Department of a transfer pricing shortfall amount.
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