Hong Kong: BEPS participation, recommendations pending government action

BEPS participation, pending government action

Hong Kong has accepted the OECD's invitation to join—as an “associate”—the project and framework under the OECD's final reports and recommendations of the base erosion and profit shifting (BEPS) project.

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Hong Kong has committed to the comprehensive BEPS package, including the four minimum standards—i.e., in the areas of harmful tax practices, tax treaty abuse, country-by-country reporting requirements and improvements in cross-border tax dispute resolution—and to the consistent implementation of these standards. 

This announcement marks the government’s first formal public action regarding the BEPS project and may be seen as an important step forward for the territory with respect to transfer pricing enforcement. However, formal legislative action and adoption of the BEPS recommendations by Hong Kong may be delayed, given the standard governmental process and a backlog of issues pending before the Legislative Council. It may be some time before the necessary amendments are approved.

KPMG observation

Tax professionals expect that the OECD’s BEPS recommendations will be adopted by Hong Kong in time. However, it remains to be seen how long the process will take for the recommendations to be given legislative effect. Also, it is not yet certain how or when the Inland Revenue Department would adjust its transfer pricing audit approach and put the BEPS recommendations into practice. In any event, prudent taxpayers would take certain action steps now to assess whether their transfer pricing policies and practices are consistent with the BEPS recommendations and to address any deviations from the BEPS recommendations. 

Background

The OECD’s BEPS project was launched in September 2013 with an aim that profits would be taxed in the jurisdiction where economic activities take place and value is created. From this project, a comprehensive package of measures, consisting of reports on the 15 BEPS actions, were developed and issued in October 2015.

Hong Kong is not a member of the OECD and, consequently, did not participate in the development of the measures to address base erosion and profit shifting. However, as an associate member, Hong Kong would have “equal footing” with the other countries and jurisdictions to implement the recommendations, including the four minimum standards:

Model provisions to prevent treaty abuse, including through treaty shopping that will impede the use of “conduit companies” in countries and jurisdictions with favourable tax treaties, to channel investments and obtain reduced rates of taxation.

Standardised country-by-country reporting to afford tax administrations a global picture of where the profits, tax, and economic activities of multinational entities are reported, and the ability to use this information to assess transfer pricing and other BEPS risks, thereby allowing tax administrations to focus their tax audit resources to areas where they will be most effectively deployed.

A revitalised peer review process to address harmful tax practices, including patent boxes when they include harmful features, as well as a commitment to transparency through the mandatory, spontaneous exchange of relevant information on taxpayer-specific rulings which, in the absence of information exchange, could give rise to BEPS concerns.

An agreement to secure progress on dispute resolution, with the strong political commitment to the effective and timely resolution of disputes through the mutual agreement procedure (MAP). 

 

For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services in Hong Kong: 

John Kondos | +852 2685 7457 | john.kondos@kpmg.com

Lu Chen | +852 2143 8777 | lu.l.chen@kpmg.com

Irene Lee | +852 2685 7372 | irene.lee@kpmg.com

Chloe Li | 852 2143 8710 | chloe.w.li@kpmg.com

William Wong | +852 2685 7599 | william.c.wong@kpmg.com

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