On 21 December 2023, the Hong Kong Inland Revenue Department declared the launch of a public consultation on the implementation of 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 risks arising from the digitalization of the economy (commonly known as BEPS 2.0).
Previously, in the 2023-24 Budget, Hong Kong declared its intention to adopt the Pillar 2 global minimum effective tax rate, with the implementation to be effective in 2025.
The BEPS 2.0 package was promulgated by the OECD in October 2021. The goal of the global anti-base erosion (GloBE) rules under Pillar Two of the package is to ensure that large multinational enterprise (MNE) groups with consolidated annual revenue of at least 750 million euros pay a global minimum tax of at least 15 percent on income derived by their constituent entities in every jurisdiction where they operate, thereby putting a floor on competition over corporate income tax.
The implementation of the global minimum tax will reduce the latitude for jurisdictions to introduce tax exemption or extremely low preferential tax rates as a means to enhance their tax competitiveness in the future, thus creating a more level playing field in terms of taxation. In 2021, Hong Kong joined more than 130 jurisdictions in committing to implementing BEPS 2.0.
As announced by the Financial Secretary in the 2023-24 Budget, Hong Kong will apply the global minimum effective tax rate of 15 percent on in-scope MNE groups starting from 2025 onwards. 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.
Under the global minimum tax, if the effective tax rate of an in-scope MNE group in Hong Kong is lower than 15 percent, other relevant jurisdictions have the right to collect top-up tax with respect to 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 percent.
Hong Kong will need to amend the Inland Revenue Ordinance (Cap. 112) to implement the global minimum tax and the HKMTT. To take forward the legislative exercise, a consultation exercise will be launched. A consultation paper has been published today to explain the concepts of the GloBE rules, which will be strictly followed by Hong Kong and other jurisdictions, and the HKMTT, and seek views on specific implementation issues. Such issues include:
- the Government’s proposed approach with respect to certain areas relating to the implementation of the GloBE rules;
- the design and implementation of the HKMTT; and
- the tax compliance and administration framework.
To reduce compliance burden and enhance tax certainty, the Government has proposed business-friendly features in the overall framework of the implementation of the global minimum tax and the HKMTT. These include:
- 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;
- allowing an in-scope MNE group to decide on how the HKMTT payable is allocated among its Hong Kong entities to provide flexibility;
- providing for safe harbors in the framework to relieve compliance burden and enhance tax certainty; and
- 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.
Subject to the outcome of the consultation exercise, the government aims to introduce the legislative amendments to the Legislative Council in the second half of 2024.
