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Whether a CDTA Can Import an Additional Assessing Power into the Inland Revenue Ordinance in Relation to Transfer-Pricing Adjustments

Hong Kong has now concluded 18 Comprehensive Double Taxation Agreements (CDTAs) for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes and income with other jurisdictions. A CDTA is a bilateral agreement between two states or jurisdictions. A main purpose of a CDTA is to avoid double taxation by allocating the right to tax an income item arising from a cross-border transaction between the state of residence of a taxpayer and the state of source of the income item. Under a CDTA, the taxing right to an income item may be allocated exclusively to the state of residence, hence avoiding double taxation. Alternatively, where both the state of residence and the state of source have taxing rights over an income item, it is generally up to the state of residence to grant relief from double taxation under a CDTA either by exempting the income item, or by allowing taxes paid in the state of source to be creditable against the tax payable on the same income in the state of residence.