In cross-border economic activities, transfer pricing between associated enterprises has always been a topic of concern for tax authorities across various regions. In November 2016, the Macau SAR formally joined the OECD and committed to implementing a number of the Inclusive Framework on Base Erosion and Profit Shifting minimum standards to regulate such activities.
The Profits Tax Regulation, which was amended by the Legislative Assembly in 2019 through Law No. 21/2019, establishes obligations concerning documentation and information under a three-tier framework, for entities established in Macau that serve as ultimate parent entities of multinational enterprise groups. If the consolidated financial statements of such an entity for the fiscal year of 2019 show total revenue of MOP 70 billion or above, it must submit to the tax authority information relating to its group and member entities for the reporting financial year, through submission of a local file, a master file, and country-by-country reporting.
The referred-to tax reform only laid the foundation to establish this three-tier framework, without providing a transfer pricing regime for transactions between related parties. Thus, the pricing evaluation in transactions remains subject to the technical discretion of the tax authority, which might lead to uncertainty or unfairness in the determination of taxable income.
Five years later, through the approval of the Tax Code (Law No. 24/2024), the Profits Tax Regulation introduces definitions of transfer pricing, the arm’s-length principle, and related parties. If commercial or financial transactions take place between taxable entities in Macau and related parties in other tax jurisdictions, the tax bureau can evaluate and adjust the transfer prices. The arm’s-length principle requires that in transactions between taxable entities and related parties, terms and conditions must be agreed, accepted, and practised that are substantially identical to those that would be applied in comparable transactions between unrelated parties. The Profits Tax Regulation also adapts to standard transfer pricing methodologies, such as the comparable uncontrolled price method, the cost-plus method, and the resale price method.
The relevant details on execution – e.g., the transfer pricing methods, the definition of relationships between related parties, relevant documentation, the procedures to adjust taxable income, and the situations in which the tax bureau will waive the duty to prepare such documentation – are expected to be supplemented by administrative regulations that comply with international standards.
The Profits Tax Regulation, on the matter of transfer pricing, will come into force on January 1 2026. Therefore, if multinational groups with entities established in Macau that serve as ultimate parent entities are conducting related-party transactions or will be conducting such transactions after the regulation comes into force, these companies should make use of the current period to review their policies, adapt to the new legal framework, and ensure that such transactions comply with the updated regulation.
