Hong Kong Implements BEPS Minimum Standards

Hong Kong Implements BEPS Minimum Standards

The Hong Kong Government today gazetted the Inland Revenue (Amendment) (No.6) Ordinance 2018, to implement the minimum standards agreed under the base erosion and profit shifting (BEPS) project and to codify the transfer pricing principles into the Inland Revenue Ordinance (Cap. 112).

Under the Amendment Ordinance, the ultimate parent entity of a multinational enterprise (MNE) group which is Hong Kong tax resident is required to file country-by-country (CbC) reports to the tax authority for exchange with other tax jurisdictions if the annual consolidated group revenue is not less than HKD6.8bn. The Amendment Ordinance also requires taxpayers to prepare “master files” and “local files” as part of the transfer pricing documentation, subject to certain exemptions.

In addition, the Amendment Ordinance gives a statutory basis to the cross-border dispute resolution mechanism (mutual agreement procedure and arbitration) and advance pricing arrangement, which were previously implemented based on the tax authority’s administrative rules.

The provisions relating to transfer pricing (except for sections 15F and 50AAK), relief consequential on transfer pricing adjustment, advance pricing arrangement, tax credit, and profits tax concessions will apply in relation to tax payable for assessment year beginning April 1, 2018. The provisions relating to CbC reporting will apply in relation to an accounting period beginning January 1, 2018, whilst those relating to “master file” and “local file” will apply in relation to an accounting period beginning April 1, 2018.

Section 15F (taxation of income derived from intellectual property by non-resident associates) and section 50AAK (attribution of income or loss to non-resident persons’ permanent establishments in Hong Kong) will apply in relation to a year of assessment beginning April 1, 2019, so as to give taxpayers a longer lead time to make preparation.

The Government said that the IRD will provide further implementation guidance to facilitate enterprises’ compliance with the new requirements through Departmental Interpretation and Practice Notes.

“The Amendment Ordinance aligns the Inland Revenue Ordinance with the latest guidance promulgated by the OECD. In meeting the international requirements, we also seek to minimize the compliance burden for the business sector,” a Government spokesman said. “The codification of the transfer pricing rules provides greater clarity and certainty for taxpayers. Our long-established territorial source principle of taxation will continue to apply to determine the chargeability of income or profits to Hong Kong tax.”