Group Tax Planning Considerations

BVI ES Rules

With the implementation of the British Virgin Islands (BVI) Economic Substance Rules (ES Rules), BVI legal entities carrying out relevant activities now have to make a decision on either moving their management and operations to the BVI or reporting their tax in their tax resident jurisdictions.

While BVI pure equity holding entities (which only derive dividend income and/or capital gains) will generally find it easier to comply with BVI ES Rules, most entities carrying out other relevant activities should now have been reporting tax in their tax resident jurisdictions. In this regard, Hong Kong would likely be one of the most attractive jurisdictions given its low tax rate and convenience to set up substance.

Particular attention should be paid to BVI entities engaged in IP business as they could be subject to heavier penalties. In the past, multinational corporations would set up IP-holding entities in low or no tax jurisdictions including the BVI, which would charge royalties to global operating entities to lower the group overall effective tax rate. As these IP business are rarely created and developed in the BVI, it would now be difficult for these BVI entities to justify they would be BVI tax resident under BVI ES Rules.

For BVI entities incorporated before 2019, their first reporting on ES Rules would be the end of 2020. Multinational corporations should consider carrying out tax reform before completing their first reporting.

Transfer pricing documentation – master file and local file

For December year-end entities, the due dates to prepare their first transfer pricing master file and local file to the Hong Kong Inland Revenue Department (IRD) is 30 September if the following exemption does not apply. As some may be new to transfer pricing rules, it is important to allocate sufficient time to these activities.

Hong Kong entities have to prepare master file and local file if they fulfill two criteria. The first is based on the size of the business, with businesses that have two of the following meeting the criteria: total annual revenue > HK$400 million, total assets > HK$300 million, or average number of employees over 100. The second criteria is based on the number of related party transactions, where companies with one of the four would be classed as meeting the requirements, transfers of properties (excludes financial assets/intangibles) > HK$220 million, transactions in financial assets > HK$110 million, transfers of intangibles > HK$110 million, or any other transactions (e.g. royalty income/expenses, service income) > HK$44 million.

Hong Kong entities should now review whether they meet both of the above criteria while preparing their financial statements. Management should be mindful that Supplementary Form (S2) to Profits Tax Return has requested them to indicate whether they are required to prepare master file, local file as well as country-by-country return.

Management should also be mindful that the IRD is empowered to impose not only an administrative penalty, but also penalties on transfer pricing adjustments (up to the amount of tax underpaid) when the corporation fails to present proper transfer pricing documentation upon request.

HKICPA e-Series

The following e-Series in taxation, banking, corporate finance and legal & compliance from the Institute can help members can keep abreast of the latest updates anytime at their office or at home.

•    Transfer Pricing Documentation and Common Reporting Standard;
•    PRC Individual Income Tax Update and Hong Kong Certificate of Resident Status Application;
•    Economic substance requirements in the British Virgin Islands and Cayman Islands
•    Profits Tax Return Update (Including new Supplementary Forms)

While PAIBs would have lots of areas to focus on, the above seminars will allow them to quickly master the basic knowledge of the latest Hong Kong and international tax regulations which would have significant tax impact on multinational corporations.