HK To Join Int'l Tax Reform

The Government today said Hong Kong, as an international financial and commercial centre, will actively participate in and implement the framework for international tax reform on base erosion and profit shifting (BEPS) and its implementation plan.

The framework, commonly known as BEPS 2.0, and its implementation plan were announced by the Organisation for Economic Co-operation & Development yesterday.

This BEPS 2.0 package consists of two parts. The first part targets large multinational enterprise (MNE) groups with global turnover above 20 billion euros and profitability above 10%, and distributes the taxing rights in respect of a certain portion of their residual profit to the market jurisdictions.

The second is the implementation of a global minimum effective tax rate, which targets large MNE groups with global turnover above 750 million euros. If the effective tax rate of an MNE group in a jurisdiction is below 15%, its parent or subsidiary companies will be required to pay top-up tax in respect of the shortfall in the jurisdictions they are located.

A total of 136 jurisdictions around the world, including Hong Kong, have indicated acceptance of the package so far.

The organisation aims to complete the drafting of the BEPS 2.0 model rules by the end of this year to early next year so that participating jurisdictions can roll out their domestic legislative exercises in 2022 and implement the package from 2023.

The Government noted that the BEPS 2.0 package targets primarily large MNE groups which meet the specified conditions and will not affect small and medium-sized enterprises in Hong Kong.

It also pointed out that the standard rate of Hong Kong's profits tax at 16.5% is competitive internationally and the city's simple and transparent tax regime is well received by investors.

Upon the package's implementation, the effective tax rates of relevant large MNE groups in each jurisdiction will have to be at least 15%. This will reduce the effectiveness for the jurisdictions to introduce tax exemption or extremely low preferential tax rate as a means to increase their competitiveness in future.

The Government therefore believes that Hong Kong will be able to reinforce its competitive advantages under a more level playing field in terms of taxation.

The Advisory Panel on BEPS 2.0 established by the Government will submit recommendations on how Hong Kong should comply with the requirements after the organisation finalises the model rules.

The Government said it will carefully study the panel's recommendations, and undertake the domestic legislative exercise after consulting stakeholders to implement the tax measures under BEPS 2.0 based on the finalised model rules.

It will also maintain the strengths of Hong Kong's tax system and endeavour to minimise the compliance burden of the large MNE groups.