Hong Kong: Amending or Adapting Advance Pricing Agreements in View of Covid-19 Disruptions

April 13, 2021, 7:01 AM

Advance pricing agreements (APAs) provide a way for multinational enterprises to achieve advance certainty in managing and mitigating their transfer pricing risks. The uncertainty and economic downturn arising from the Covid-19 pandemic could have a significant impact on the transfer pricing policy adopted in an existing APA or an APA under negotiation. We outline below some key areas that should be reviewed and managed by taxpayers when amending or adapting their APAs in Hong Kong to cater for disruptions caused by Covid-19.


The statutory regime for APAs in Hong Kong provides for unilateral, bilateral, and multilateral APAs. Guidance regarding the process of and procedures for applying for an APA is provided in Departmental Interpretation and Practice Notes (DIPN) No. 48 (Advance Pricing Arrangement) issued by the Inland Revenue Department (IRD).

The APA program in Hong Kong was first introduced in 2012. Following codification of the framework for APAs in 2018, a revised version of the DIPN was issued by the IRD to streamline the process for applying for APAs in July 2020 (and which replaced the previous version issued in March 2012). Before the streamlining of the APA process, only a limited number of APAs had been concluded in Hong Kong. It is expected that the number of APA applications and APAs concluded will gradually increase under the new streamlined process.


The unprecedented situation due to Covid-19 has raised many tax issues. The Organization for Economic Cooperation and Development has released guidance on the transfer pricing implications of the Covid-19 pandemic (OECD Covid-19 TP Guidance) to provide some guidelines for dealing with transfer pricing issues, including APAs, in the time of the pandemic.

The IRD has not issued any guidance or note in relation to transfer pricing or APAs in response to the pandemic or officially endorsed the OECD Covid-19 TP Guidance. As such, the revised DIPN remains the key administrative guidance for APAs in Hong Kong.

As a result of Covid-19 disruptions, taxpayers should consider the following from an APA perspective:


Breach of Critical Assumptions

An APA requires compliance with particular terms and agreed critical assumptions on which the selected transfer methodology is based. The Inland Revenue Ordinance (IRO) imposes obligations on taxpayers to: (1) notify the Commissioner of Inland Revenue (CIR) upon the breach of any critical assumption specified in the arrangement within one month after such breach; and (2) provide to the CIR from time to time all reports and information that the taxpayers may be required to provide under the APA.

As such, it is important for taxpayers with existing APAs to assess whether any critical assumption is no longer met due to Covid-19 disruptions, e.g., critical assumptions as to economic conditions, market share, market conditions, end-selling price and sales volume; critical assumptions about the nature of the functions and risks of the enterprises involved in the transactions; etc.

If there is a breach of any critical assumption in an existing unilateral APA, the CIR can revoke, cancel, or revise the APA according to the procedures set out in the revised DIPN. If there is a breach of any critical assumption in an existing bilateral or multilateral APA, the CIR will inform the competent authority of the relevant tax treaty partner of such breach. The CIR and the relevant competent authority will then discuss how to treat the breach under the mutual agreement procedure article of the relevant tax treaty.

Taxpayers should approach the IRD proactively to propose a review of the relevant APA and discuss with the IRD to determine the appropriate course of action to take if a critical assumption in a concluded APA is no longer applicable. During these discussions and negotiations, taxpayers should evaluate whether it is still advisable to continue with an existing APA given the impact of Covid-19.

Revision of or Withdrawal From an Existing APA

The IRO only expressly allows the CIR, and not the taxpayer, to revoke, cancel, or revise a concluded APA if there is a breach of a critical assumption, a failure to comply with the terms of the APA on the part of the taxpayer, or a material misrepresentation or omission on the part of the taxpayer, etc. If a taxpayer wishes to terminate or amend an APA due to Covid-19 disruptions, it should first examine whether any critical assumptions, e.g., regarding economic and business conditions, has been breached. If there is such a breach, the APA review process discussed above would be initiated.

Taxpayers in the Process of Making an APA Application

Taxpayers should determine whether it is still desirable to continue with an APA application due to the uncertainty of future economic conditions as there could be a significant risk that the critical assumptions agreed upon would not be met for the entire APA term.

A taxpayer should first consider whether an adjustment or amendment to the APA proposal is feasible. If not, a taxpayer may unilaterally withdraw an APA application at any time before an APA is executed by providing written notice to the CIR. APA application fees are generally not refundable. That said, the CIR may exercise its discretion to waive all or part of the fees if an APA cannot be made because of some unforeseen circumstances beyond the control of the CIR and the taxpayer. Taxpayers should however note that information provided for the purposes of an APA application can potentially be used by the IRD in subsequent tax audits or proceedings.


The Covid-19 pandemic has led to changes in global economic and business conditions which impact concluded APAs and those under application and negotiation. Engaging with the IRD proactively with well prepared documentation is of crucial importance where there is any breach or potential breach of a critical assumption, to assess whether a revision or cancellation of the APA is the appropriate way forward. In applying for and negotiating APAs in these times of uncertainty, a dynamic and strategic approach is necessary to secure an optimal outcome.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Steven Sieker is a Tax Partner and Managing Partner for Baker McKenzie’s China and Hong Kong offices. Pierre Chan is a Partner, and Carrie Lui is a Special Counsel of the Tax Practice Group at Baker McKenzie.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.

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