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Inland Revenue Department Hong Kong DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES NO.

45 RELIEF FROM DOUBLE TAXATION DUE TO TRANSFER PRICING OR PROFIT REALLOCATION ADJUSTMENTS These notes are issued for the information of taxpayers and their tax representatives. They contain the Department'

s interpretation and practices in relation to the law as it stood at the date of publication. Taxpayers are reminded that their right of objection against the assessment and their right of appeal to the Commissioner, the Board of Review or the Court are not affected by the application of these notes. LAU MAK Yee-ming, Alice Commissioner of Inland Revenue April

2009 Our web site : www.ird.gov.hk DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES No.

45 CONTENT Paragraph Introduction Types of international double taxation

2 Where no double tax agreement exists

8 Transfer pricing adjustment by a non-DTA state

9 Economic double taxation Transfer pricing adjustment by a DTA state

14 Appropriate adjustment of tax charged

20 Retrospective adjustment

23 Deemed dividend

26 Transfer pricing adjustment by the Commissioner

29 Losses

31 Exchange of information

32 Withholding taxes

33 Juridical double taxation Profit reallocation by a DTA state

36 Adjustment by foreign tax administration

41 Adjustment by the Commissioner

48 Taxation not in accordance with the DTA The Mutual Agreement Procedure

52 Stage

1 - Presentation of case

57 Stage

2 - Joint resolution

66 Year of adjustment

69 Competent authority communications

72 Time for resolution of cases

76 Interaction between mutual agreement procedure and objection

77 rights under the IRO Paragraph Where competent authority agreement is reached

80 Where taxpayer does not agree with competent authority agreement

83 Where competent authority agreement has not been reached

84 Interaction between mutual agreement procedure and review rights in the other DTA state

87 Payment of tax during mutual agreement procedure

91 ii INTRODUCTION Hong Kong has entered into a number of Double Taxation Agreements (DTAs) with other tax jurisdictions. One of the main purposes of such agreements is the avoidance of double taxation. This Departmental Interpretation and Practice Note sets out the Department'

s views and practices on granting relief from double taxation due to a transfer pricing or profit reallocation adjustment under a DTA. Types of international double taxation 2. Generally, two types of international double taxation are recognised in the context of DTAs: (a) economic double taxation;

and (b) juridical double taxation. 3. Economic double taxation arises where two enterprises resident in different states are assessed to tax on the same profit or income, without relief provided by either state for tax imposed by the other. This double taxation may arise as a consequence of non-arm'

s length transactions. The profits of one enterprise are adjusted upwards increasing the tax charged on that enterprise in one state (i.e. a primary transfer pricing adjustment), without a corresponding downward adjustment to the tax payable of the associated enterprise in the other state. 4. Juridical double taxation occurs where an enterprise is charged to tax on the same profit or income in two different states (e.g. a single legal entity having a head office in its state of residence has set up a permanent establishment in another state), without either state providing relief for tax imposed by the other. This double taxation may arise where the profits that are taken to have arisen from the enterprise'