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Frequently Asked Questions & Answers on Completion of Supplementary Form S2 – Transfer pricing (applicable for year of assessment 2018/19 and subsequent years)
Introduction
For the benefit of the tax paying public and their tax representatives, some frequently asked questions and their answers are listed below for general information and guidance.
General
1.
Q:
Under what circumstances should I file the supplementary form S2 – Transfer pricing?
A:
| (a) | You had transactions with non-resident associated persons; or |
| (b) | You had entered into an advance pricing arrangement with the Commissioner; or |
| (c) | You belonged to a multinational enterprise group (MNE Group) which has the obligation to file country-by-country (CbC) report in Hong Kong or elsewhere; or |
| (d) | You are a constituent entity of a multinational enterprise group with a total consolidated group revenue of at least EUR 750 million, or an equivalent amount as at the accounting period end date, for the immediate preceding accounting period. |
2.
Q:
Do I have to complete all four sections in the form?
A:
No. You are only required to complete the section(s) in the form as applicable.
3.
Q:
If space provided on the form is insufficient, what should I do?
A:
You can give the details on a separate sheet of paper and staple it to the Control List for Supplementary Form and Other Form (IR1477). For each sheet, you have to put the file number and sign at the bottom of the sheet. Do not complete another set of the form to provide the additional information.
Section 1 – Transactions with non-resident associated persons / other parts of the non-Hong Kong resident person
4.
Q:
What does the term "non-resident associated persons / other parts of the non-Hong Kong resident person" refer to?
A:
A person is associated with another person (each an affected person), if, at the time of carrying out the transaction, one of the affected persons was participating in the management, control or capital of the other affected person, or the same person or persons was or were participating in the management, control or capital of each of the affected persons. You have transactions with other parts of the non-Hong Kong resident person if you are a Hong Kong permanent establishment of a non-Hong Kong resident person and have transactions with the other parts of that non-Hong Kong resident person, e.g. transactions between the head office and its branch. Non-resident associated person means that person is not resident for tax purposes in Hong Kong.
5.
Q:
I have carried on business with five non-resident associated persons. Three are corporations incorporated in the British Virgin Islands but carrying on their business in Germany and the remaining two are corporations incorporated in Macao SAR and Australia. What information should be provided in section 1.1?.
A:
You should tick all three checkboxes and state Australia in the space provided in "Others".
6.
Q:
Am I required to prepare a master file and a local file?
A:
| If you are a Hong Kong entity of a group (in extended sense), then you are required to prepare and retain the entity's local file and a master file of its group in respect of an accounting period beginning on or after 1 April 2018, except where – | ||
| (a) | any 2 of the following conditions are satisfied – | |
| (i) | the total amount of the entity's revenue for the accounting period does not exceed HK$400 million; | |
| (ii) | the total value of the entity's assets at the end of the accounting period does not exceed HK$300 million; | |
| (iii) | the average number of the entity's employees during the accounting period does not exceed 100; | |
| OR | ||
| (b) | the total amounts of all the following types of controlled transactions (excluding specified domestic transactions) undertaken by the entity in respect of the accounting period do not exceed the specified amount: | |
| (i) | the total amount of transfers of properties (excluding financial assets and intangibles) does not exceed HK$220 million; | |
| (ii) | the total amount of transactions in respect of financial assets does not exceed HK$110 million; | |
| (iii) | the total amount of transfers of intangibles does not exceed HK$110 million; | |
| (iv) | the total amount of other transactions does not exceed HK$44 million. | |
7.
Q:
What does the term "group in the extended sense" refer to?
A:
| "Group in the extended sense" means – | ||
| (a) | a group in the usual sense, which means a collection of enterprises related through ownership or control such that – | |
| (i) | it is required to prepare consolidated financial statements for financial reporting purposes under applicable accounting principles; or | |
| (ii) | it would be so required if entity interests in any of the enterprises were traded on a public securities exchange; or | |
| (b) | a single enterprise if it is resident for tax purposes in one jurisdiction and is subject to tax in another jurisdiction with respect to the business carried out through a permanent establishment in that other jurisdiction. | |
8.
Q:
I have ticked "Yes" in section 1.2, do I need to file the master file and local file with the supplementary form?
A:
No, you are not required to file the master file and local file with the supplementary form. You only need to state whether you are required to prepare master file and local file. Under section 58C(2)(a) of the Inland Revenue Ordinance ("IRO"), the period for preparing the relevant files is 9 months after the end of the accounting period concerned.
Section 2 – Advance pricing arrangement
9.
Q:
What is an advance pricing arrangement (APA)?
A:
You can click here for details.
10.
Q:
I have entered into an APA with the Commissioner but not relied on it in preparing the Profits Tax return. Do I need to complete section 2?
A:
Yes. You still have to provide the reference number of the APA in section 2.1, tick "No" in section 2.2, state whether there has been material change to facts and circumstances identified in the APA in section 2.3 and declare "0" in section 2.4.
11.
Q:
What should I do if I find that the facts and the circumstances identified in the APA previously entered into with the Commissioner have material changes?
A:
In addition to other sections, you should tick "Yes" in section 2.3 and provide the details of the changes on a separate sheet.
12.
Q:
I have completed section 2 of the supplementary form. Do I still need to file the APA compliance report?
A:
Yes. Information provided in section 2 of supplementary form S2 is required pursuant to section 50AAQ(2) of the IRO. Such Information is not equivalent to the APA compliance report which is required under section 50AAS(b) of the IRO.
Section 3 – Country-by-Country reporting obligation
13.
Q:
What is the Country-by-Country reporting obligation?
A:
You can click here for details.
14.
Q:
Do I need to file a notice in respect of the MNE Group under section 58H of the Inland Revenue Ordinance ("IRO")?
A:
If you are a Hong Kong entity of a MNE Group that is a reportable group, then you must, within 3 months after the end of the accounting period, file a written notice with the Commissioner to identify the ultimate parent entity of the group or the constituent entity responsible for filing the CbC report through the CbC Reporting Portal unless (a) you are not the ultimate parent entity of the group, the surrogate parent entity of the group nor the entity that is to file a CbC return for the group; and (b) another Hong Kong entity of your group has filed such a notice.
15.
Q:
What do the terms "MNE Group" and "reportable group" refer to?
A:
| A MNE Group means a group in the usual sense that includes: | |
| (a) | two or more enterprises of which the tax residence is in different jurisdictions; or |
| (b) | an enterprise that is resident for tax purposes in one jurisdiction and is subject to tax in another jurisdiction with respect to the business carried out through a permanent establishment in that other jurisdiction. |
| A MNE Group is also a reportable group for an accounting period if it had a total consolidated group revenue (reflected in the group's consolidated financial statements) of at least the following threshold amount for immediate preceding accounting period (the accounting period that ends immediately before the commencement of the accounting period concerned): | |
| (a) | For a group with its ultimate parent entity resident in Hong Kong – HK$6.8 billion; or |
| (b) | For a group with its ultimate entity resident in a jurisdiction other than Hong Kong – the threshold amount for CbC reporting specified under the laws or regulations of that jurisdiction or an amount equivalent to EUR750 million as at January 2015. |
16.
Q:
What do the terms "ultimate parent entity" and "surrogate parent entity" refer to?
A:
| Ultimate parent entity" means a constituent entity of a group in the usual sense that meets the following conditions: | |
| (a) | It owns directly or indirectly a sufficient interest in one or more other constituent entities of the group such that it is required to prepare consolidated financial statements under accounting principles generally applied in its jurisdiction of tax residence, or would be so required if its equity interests were traded on a public securities exchange in its jurisdiction of tax residence; and |
| (b) | There is no other constituent entity of the group that owns directly or indirectly an interest described in paragraph (a) in the constituent entity. |
| "Surrogate parent entity" means a constituent entity of a reportable group appointed as the sole substitute for the ultimate parent entity to file a CbC return or report on behalf of the group. | |
17.
Q:
If I am not the ultimate parent entity / surrogate parent entity / constituent entity responsible for filing country-by-country report of the MNE Group and another Hong Kong entity of the MNE Group has filed the notice under section 58 of the IRO, how should I complete section 3?
A:
You have to tick "No" in section 3.1, tick "Yes" in section 3.2 and provide the name and business registration number of that Hong Kong entity.
18.
Q:
Can I provide the details of the group's ultimate parent entity and surrogate parent entity in sections 3.3.1and 3.3.2 instead of filing a notice under section 58H of the IRO?
A:
No. Completion of sections 3.3.1 and 3.3.2 will not constitute the submission of a notice under section 58H of the IRO. Besides, you only have to complete these two sections if your answers to both sections 3.1 and 3.2 are "No".
19.
Q:
How should I provide the business registration number / tax identification number requested in sections 3.3.1.3 and 3.3.2.3?
A:
If the group's ultimate parent entity and surrogate parent entity have a business registration number, please provide it. Otherwise, provide the tax identification number.