On 4 July 2018, the Legislative Council adopted the new transfer pricing regime ((Amendment) (No. 6) Bill 2017 (the “BEPS Bill”)). During the legislative process, some changes were made to the initial bill. Remarkable changes are the possible exclusion of domestic transactions from the transfer pricing rules and the relaxation of the transfer pricing documentation.

Certain domestic transactions that do not give rise to actual tax differences in Hong Kong are expressly exempted from tax- if the transaction is domestic in nature; does not give rise to an actual tax difference, and not utilized for tax avoidance purposes.

The thresholds on the business size test have been relaxed in the final legislation. Hong Kong entities shall be required to prepare Master File and Local File for accounting periods beginning on or after 1 April 2018 when they met threshold-based criteria. The final regulation set out thresholds based on (i) the size of the business and (ii) the volume of different categories of related party transactions.

Under the size based threshold a Hong Kong taxpayer meeting any two of the provided three conditions required to prepare master file and local file. Three conditions are a) Total annual revenue exceeding HKD 400 million, b) Total value of asset exceeding HKD 300 million, and c) Average number of employee exceeding 100. On the other hand taxpayer meeting any one of the provided three conditions required to prepare master file and local file under the volume-based related party transaction. Conditions under this are a) Annual amount of buy-sell transactions of tangible goods exceeding HKD 220M, b) Annual amount of transfer of financial assets / intangible assets exceeding HKD 110M, and c) Annual amount of other transactions exceeding HKD 44M.

The Bill will be enacted as Inland Revenue (Amendment) (No. 6) Bill 2018 (the “BEPS Bill”) and come into force after it has been signed by the Chief Executive and published in the Gazette.