The Inclusive Framework on BEPS (commonly known as "BEPS 2.0") proposed by the OECD in the fourth quarter of Year 2020 has been formally set out as a specific plan after the discussions in the G7 Meeting in June this year. Please refer to our Monthly Newsletter Update – April 2021 published earlier for detailed introduction to the Framework: Click here

Consensus on two major aspects of BEPS 2.0 project have been reached by member countries of G7:

  1. 1
    They are committed to reaching an agreement on the allocation of part of the taxing rights to the market jurisdictions (generally interpreted as the location of customers / markets of the multinational enterprises), targeting on the largest and most profitable multinational enterprises with global revenue of over EUR 20 billion (around HKD181 billion) and profit margin exceeding 10%; and
  2. 2
    They are committed to a global minimum tax of at least 15% on a country by country basis, targeting those multinational enterprises with global revenue of over EUR 750 million (around HKD 6.8 billion). It is proposed that the parent company / headquarter of the group would have to pay for the difference in actual tax rate in a particular jurisdiction and the global minimum tax rate of 15%.

BEPS 2.0 project aims to achieve an even allocation of taxing rights and ensures that large multinational enterprises pay at least a minimum level of tax. Around 130 tax jurisdictions (including Hong Kong) have already expressed their support towards the project plan.

The Hong Kong Government has established a Consultancy Group in June 2020 to review the possible impact of BEPS 2.0 to the overall business environment in Hong Kong. The Budget announced in February this year also indicated that Hong Kong shall follow the international consensus in the implementation of BEPS 2.0.

Points to Note

It appears that BEPS2.0 targets large multinational groups only. However, since general consensus of the G7 participating countries and other tax jurisdictions have already been established, it is expected that some tax authorities may extend the requirements under BEPS2.0 to other smaller multinational groups.

For companies Hong Kong and PRC enterprises, the implementation of BEPS 2.0 will cause an impact to the following taxpayers: 

  • Taxpayers who apply for offshore tax exemption in Hong Kong (while no tax has been paid in another jurisdiction);
  • Taxpayers who pay considerable sums to companies located in jurisdictions where corporate tax rate is lower than 15% (i.e., the BVI, Cayman Islands, etc.); and
  • Multinational group with its management located outside Macau, but retained significant amount of profits in Macau (please note that the current corporate tax rate in Macau is 12%, which is lower than the proposed minimum tax rate of 15%).

Given that the Hong Kong Government has expressed its supportive view to BEPS 2.0, taxpayers should expect the Hong Kong Inland Revenue Department to start examining strictly on the tax position of the companies in Hong Kong and other jurisdictions in order to show its support to global direction of improving tax transparency. Taxpayers should consider whether they should change their tax planning strategies, such as establishing economic substance in Hong Kong so as to become a Hong Kong Tax Resident, in order to meet the upcoming changes in global tax practices.

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