Hong Kong joined more than 130 jurisdictions in committing to implementing BEPS 2.0 in 2021. The Financial Secretary announced in the 2023-24 Budget that Hong Kong will apply the global minimum effective tax rate of 15 per cent on in-scope multinational enterprise (MNE) groups starting from 2025 onwards.
On 21 December 2023, the Hong Kong Government launched a consultation on the implementation of global minimum tax and minimum top-up tax.
The consultation aims to gather public views on the implementation of the global minimum tax under Pillar Two of the international tax reform proposals drawn up by the Organisation for Economic Co-operation and Development (OECD) to address base erosion and profit shifting (known as BEPS) risks arising from the digitalization of the economy.
What is BEPS 2.0?
Base Erosion and Profit Shifting is commonly known as BEPS, which was promulgated by the Organisation for Economic Co-operation and Development (OECD). To address the issue of multinational enterprises (MNE) exploiting gaps and mismatches in the tax rules of different jurisdictions to avoid paying tax, the OECD published an Action Plan on BEPS with 15 BEPS actions in 2013.
With digitalization becoming mainstream globally, MNEs can access global markets way more easily, bringing tax challenges arising from the digitalization of the economy. To address these risks, the OECD updated BEPS 1.0 and issued a two-pillar solution, and it is now commonly referred to as “BEPS 2.0”. BESP 2.0 consists of two key pillars:
Pillar One – focusing on profit allocation and nexus
Pillar Two – focusing on a global minimum corporate tax rate
The goal of the global anti-base erosion (GloBE) rules is to ensure that large multinational enterprises (MNE) with consolidated annual revenue of at least 750 million euros pay a global minimum tax of at least 15 per cent on income derived by their constituent entities in every jurisdiction where they operate, thereby putting a floor on competition over corporate income tax.
Why and how does Hong Kong implement the global minimum tax?
According to the Secretary for Financial Services and the Treasury, Mr. Christopher Hui, Hong Kong as an international financial center and a responsible member of the international community, has been supportive of international efforts to enhance tax transparency and combat tax evasion. Implementing the global minimum tax is to fulfill Hong Kong’s obligation as a co-operative player in international tax co-operation and safeguard Hong Kong’s taxing rights. In 2021, Hong Kong joined more than 130 jurisdictions in committing to implementing BEPS 2.0.
Under the global minimum tax, if the effective tax rate of an in-scope MNE group in Hong Kong is lower than 15 per cent, other relevant jurisdictions have the right to collect top-up tax in respect of the low-taxed Hong Kong MNE entities concerned. To preserve Hong Kong’s taxing rights with respect to such entities instead of ceding them to other jurisdictions, Hong Kong will apply the Hong Kong minimum top-up tax (HKMTT) to in-scope MNE groups starting from 2025 onwards so that the effective tax rate of these entities will be brought up to 15 per cent. By introducing the HKMTT, in-scope MNE groups will be spared the need to pay top-up tax in every jurisdiction where they operate and ease their compliance burden.
To reduce compliance burden and enhance tax certainty, the Hong Kong Government has proposed business-friendly features in the overall framework of the implementation of the global minimum tax and the HKMTT, including:
1. aligning the design of the HKMTT, including the scope and tax rate, with that of the global minimum tax to ensure simplicity of the regime;
2. allowing an in-scope MNE group to decide on how the HKMTT payable is allocated among its Hong Kong entities to provide for flexibility;
3. providing for safe harbors in the framework to relieve compliance burden and enhance tax certainty; and
4. requiring an in-scope MNE group to only furnish a single top-up tax return for the purpose of both the global minimum tax and the HKMTT to minimize compliance burden.
The Hong Kong Government launched a three-month consultation exercise to gather public views on the implementation details of the global minimum tax and minimum top-up tax. Members of the public can send their views to the Financial Services and the Treasury Bureau by post or email. The consultation will end on March 20, 2024.
Who will be impacted by the global minimum tax?
Only in-scope large MNE groups will be subject to the global minimum tax. The vast majority of corporate taxpayers, including local small and medium enterprises, will not be affected.
In Hong Kong, Pillar two should affect around 200 MNE groups which have their group headquarters in Hong Kong. Some of these MNE groups might not be subject to the global minimum tax since they have already paid an effective tax rate of 15% or more.
What is the timeline of implementing the global minimum tax in Hong Kong?
From December 21, 2023 to March 20, 2024, the Government launched a three-month consultation on the implementation of the global minimum tax and the domestic minimum top-up tax to gather views from members of the public.
In the second half of 2024, the Government targets to introduce the legislative amendments into the Legislative Council, subject to the outcome of the consultation exercise.
Starting from 2025 onwards, Hong Kong will apply the global minimum tax rate of 15 per cent on in-scope MNE groups.