The Government today (December 21) launched a consultation exercise to gather views on the implementation details 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 risks arising from the digitalization of the economy (commonly known as BEPS 2.0).
The Secretary for Financial Services and the Treasury, Mr Christopher Hui, said, "As an international financial center and a responsible member of the international community, Hong Kong has all along been supportive of international efforts to enhance tax transparency and combat tax evasion. To fulfill our obligation as a cooperative player in international tax cooperation and safeguard Hong Kong's taxing rights, Hong Kong is fully committed to implementing Pillar Two of BEPS 2.0 in accordance with international consensus."
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 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 percent. By introducing the HKMTT, in-scope MNE groups will be spared the need to pay top-up tax in every jurisdiction where they operate. This will help reduce their compliance burden.
"It would be in Hong Kong's best interest to implement the HKMTT to fulfill Hong Kong's international tax commitment and preserve its taxing rights," Mr. Hui said.
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.
"In formulating the legislative proposal, the Government will strive to maintain Hong Kong's tax competitiveness by upholding Hong Kong's simple, certain, and low tax regime. Insofar as the implementation of the global minimum tax and the HKMTT is concerned, emphasis is laid on minimizing tax compliance burden of in-scope MNE groups and maintaining the simplicity of the tax regime," Mr Hui added.
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