As transfer pricing (“TP”) enforcement by the Hong Kong Inland Revenue Department (“HKIRD”) continues to evolve, businesses in Hong Kong are expected not only to meet compliance requirements, but also to demonstrate that their TP positions are supported by the way their business actually operate.

In our experience, many TP issues do not arise from pricing alone. Rather, they arise when documentation, commercial reality, and supporting evidence do not align. This is particularly relevant for Hong Kong–Mainland China arrangements, where positions may need to withstand scrutiny from both Hong Kong and Chinese tax authorities, each with distinct focus areas including benefit, deductibility, evidentiary support and business substance.

The issues discussed in this article are drawn from practical challenges we frequently encounter when advising businesses. They also align with the Organisation for Economic Co-operation and Development (“OECD’s”) public consultation released on 1 June 2026 on proposed revisions to Chapter VII of the OECD Transfer Pricing Guidelines on intra-group services1, which highlights many of the same practical concerns relating to accurate delineation, benefit, and evidentiary support. While this article is not intended to summarise that consultation draft, it reinforces the direction in which these issues are developing.

The following examples illustrate how a focused, practical, and evidence-based approach can make a tangible difference.

 

Case Study 1: Managing Service Fee Charges Across Regions 

A Hong Kong-based company both paid service fees to multiple overseas related parties, including entities in Mainland China, for a range of support services such as management services, sales support services, and back-office functions, and also provided services to other group entities and received service fee income in return. 

This arrangement reflected a two-way intra-group service model under which service providers outside Hong Kong charged the Hong Kong entity, while the Hong Kong entity also rendered services to other related parties and received service fees from them.

Although the company had prepared TP documentation and benchmarking analyses to support the mark-ups applied, our review identified several common but significant weaknesses:

  • Insufficient explanation and supporting evidence showing whether, and to what extent, the service fee payments made by the Hong Kong entity were linked to the services it provided to other group entities and the service fee income it received
  • Limited supporting evidence demonstrating how the services were actually delivered and how they contributed to the Hong Kong entity’s operations, outbound services, or revenue generation
  • Intercompany agreements that did not clearly describe the services rendered or distinguish between inbound and outbound service flows, creating potential challenges in assessing whether certain services were duplicative in nature
  • Cost allocation methodologies and charging arrangements that were not clearly aligned with the level of benefit received or the commercial rationale for the corresponding income flows

 

We supported the company in strengthening its position through a targeted and practical review by:

  • Analysing the end-to-end service flows to determine whether, and to what extent, the service fee payments made by the Hong Kong entity were linked to the services it provided to other group entities and the service fee income it received
  • Mapping each inbound and outbound service category to the Hong Kong entity’s actual business activities, commercial needs, and revenue-generating functions, while identifying duplicative or non-beneficial services
  • Reviewing and refining the charging basis and cost allocation keys to better align with the level of benefit received, the commercial rationale of the arrangements, and the corresponding income flows
  • Enhancing the intercompany agreements and documentation framework to clearly distinguish inbound and outbound service flows, while strengthening supporting evidence such as internal communications, deliverables, and service descriptions to demonstrate how the services were actually performed

 

This review materially strengthened the company’s position by aligning the service fee arrangements more closely with business reality and improving its ability to respond to enquiries from both the HKIRD and the Mainland China tax authorities.

Key insight: Service fee arrangements are rarely challenged because of mark-up alone. More commonly, the questions centre on whether the services were actually provided, whether they were needed, and whether the benefit received can be clearly evidenced.

Having a TP report on file is not, by itself, sufficient. The service fee position must also be supported by the underlying business rationale, operational reality and contemporaneous evidence.

 

Case Study 2: TP Policy vs Execution – DEMPE in Practice

A Hong Kong-based entity within a multinational group was intended to perform key DEMPE (Development, Enhancement, Maintenance, Protection, and Exploitation) functions and earn residual profits as the economic owner of the Group’s Intellectual Property (“IP”). The IP, comprising a technical know-how in the IT industry, had previously been acquired from a third party.

To implement this operating model, the Group established a TP framework, including:

  • A clearly defined TP policy outlining the role of the Hong Kong entity as the IP owner, with non-Hong Kong entities acting as routine IT support service providers
  • Benchmarking analyses supporting the remuneration for the intra-group service providers
  • Intercompany agreements reflecting the intended structure

 

During a due diligence review initiated by a prospective investor, the Group was able to demonstrate that the TP policy had been implemented at a high level, with the routine IT support service providers earning profit margins within the benchmarked range.

However, our review identified a more fundamental issue: the operational substance in Hong Kong did not fully support the role described in the TP model. For example, the Hong Kong entity lacked the senior technical leadership and dedicated IT personnel expected of an entity performing DEMPE functions, and there was limited documentation demonstrating that key IP-related decisions were made and controlled in Hong Kong.

This gap meant that while the TP framework appeared reasonable on paper, the underlying facts did not fully support the profit allocation. As a result, there was a real risk of challenge to the claimed economic ownership of the IP, disputes over profit attribution across jurisdictions, and pressure on the returns allocated to the Hong Kong entity.

We supported the Group in addressing these issues by:

  • Reassessing where DEMPE functions were actually performed
  • Aligning the TP model with economic substance and operational reality
  • Providing recommendations to enhance substance in Hong Kong, where commercially feasible 
  • Strengthening supporting documentation.

As a result, the Group was able to proactively address gaps, improve alignment between TP policy and execution, and enhance its readiness for both investor scrutiny and tax authority review.

Key insight: A TP model is only as robust as its execution. Policies, documentation, and benchmarking outcomes alone will not be sufficient if the business lacks the people, decision-making processes, and evidence needed to support the position in practice.

 

Key Takeaways 

The central issue in TP is not whether a position appears reasonable on paper, but whether it is supported by the underlying business facts and operational reality. 

This is particularly important for service arrangements and IP structures, where tax authorities often focus on benefit, duplication, substance and evidence. A proactive review can help identify gaps early, strengthen defensibility, and reduce the risk of challenge across multiple jurisdictions.

 

What to Do Next: 

Businesses may wish to consider a transfer pricing review if they:

  • Have significant related-party transactions
  • Pay or receive intra-group service fees or royalties
  • Operate across Hong Kong and multiple jurisdictions
  • Have limited supporting evidence for intra-group charges
  • Have business operations that do not fully align with existing TP policies or documentation

A focused review can help identify the real areas of exposure, clarify priorities and determine whether the appropriate next step is TP documentation, refinement of intercompany arrangements or broader transfer pricing risk management. 

At RSM Hong Kong Advisory, our transfer pricing team supports clients across both TP documentation and broader TP advisory matters, providing practical and commercially grounded advice tailored to the facts and circumstances of each business.

 

1Public consultation on taxation: Revisions to Chapter VII of the OECD Transfer Pricing Guidelines

Get in touch with one of our specialists to learn more about our Transfer Pricing Services.

Joanna Lam
Managing Partner, Tax & Advisory

+852 2746 7600
JoannaLamLY@rsmhkadvisory.com
Peony Chow
Senior Manager, Transfer Pricing

+852 2746 7621
PeonyChowKC@rsmhkadvisory.com