Hong Kong launches consultation on global minimum taxes

On December 21, 2023, the Government 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). This was to address Base Erosion and Profit Shifting (“BEPS”) risks arising from the digitalisation of the economy (commonly known as BEPS 2.0). Pillar Two of BEPS 2.0 targets Multinational Enterprise (“MNE”) groups with annual consolidated revenue of or above EUR750 million. This is to ensure that the MNEs pay a minimum tax of 15% in respect of the profits derived from every jurisdiction they operate in through two interlocking rules, the Income Inclusion Rule (“IIR”) and the Undertaxed Profits Rule (“UTPR”), which are together referred to as the Global Anti-Base erosion (“GloBE”) rules.

Under the global minimum tax, if the effective tax rate (ETR) of an in-scope MNE group in Hong Kong is lower than 15%, 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%. The top-up tax under the GloBE or HKMTT regime is to be regarded as profits tax. Hong Kong will take a hybrid legislative approach by directly incorporating GloBE rules into the Inland Revenue Ordinance with limited adaptations as far as practicable.

Key features of the HKMTT:

MNE Group

A group has one or more entities or permanent establishments (“PEs”) located in a jurisdiction other than the ultimate parent entity (UPE) jurisdiction.
A standalone entity, which is not part of another group, but has one or more PEs located in another jurisdiction will also be considered as an MNE Group.
The group comprises entities that are included in the consolidated financial statements of the UPE. It also comprises entities that are not consolidated under the accounting standard because they are being held for sale, or excluded from consolidation solely based on size or material grounds.

Constituent entity

Each entity that is a member of a group is treated as a constituent entity.
A PE is treated as a separate constituent entity from the entity that includes the PE in its financial statements.

Implementation

• Apply to MNE groups with annual consolidated revenue of or above EUR750 million. Small MNE groups and purely local groups are excluded from the scope of the HKMTT.
• In-scope MNE groups, whether headquartered in or outside Hong Kong, will be covered by the HKMTT. All Hong Kong constituent entities of the groups, as well as JVs and JV subsidiaries held by the groups, will be subject to the HKMTT regardless of the ownership interest of the UPE or partially owned parent entity (POPE) in the entities concerned.
• HKMTT will be imposed on the whole amount of the total top-up tax computed, irrespective of the ownership interest held in the constituent entities by any parent entity of the group.
• HKMTT payable will by default be allocated among Hong Kong constituent entities of an in-scope MNE group based on the ratio of the GloBE income of the Hong Kong constituent entity to the aggregate GloBE income of all Hong Kong constituent entities of the group. Alternatively, the group can designate one or more than one Hong Kong constituent entity to pay the HKMTT.
• JVs held by an in-scope MNE group will be subject to ETR and top-up tax computations separate from those for other Hong Kong constituent entities of the group under the HKMTT. The HKMTT attributable to such JVs and their JV subsidiaries will be directly imposed on the JVs and JV subsidiaries concerned instead of being allocated to other Hong Kong constituent entities of the group.
• All Hong Kong constituent entities of the group will be jointly and severally liable for the whole amount of the top-up tax payable.
• Allow the use of local financial accounting standard for the HKMTT computation.
• Inclusion of de minimis exclusion:
  - average GloBE revenue of the MNE group in that jurisdiction for the current and two preceding fiscal years is less than EUR10 million; and
  - average GloBE income or loss of the MNE group in that jurisdiction for the same period is a loss or less than EUR1 million.

If the exclusion applies, the top-up tax for the constituent entities located in a jurisdiction shall be deemed to be zero (i.e. the MNE group is not required to compute the ETR of the constituent entities that are located in the jurisdiction).

• Allow exclusion for initial phase of international activity only where no parent entity is required to apply qualified IIR with respect to Hong Kong constituent entities of the group. This relief applies on an annual basis and expires after an MNE group has been in scope of the GloBE rules for 5 years.

An MNE group is in its initial phase of its international activity if it has constituent entities in no more than six jurisdictions and the sum of the net book values of tangible assets of all constituent entities located in all jurisdictions other than the reference jurisdiction does not exceed EUR50 million.

Hong Kong resident entity

• An entity incorporated in Hong Kong or, if incorporated outside Hong Kong, normally managed or controlled in Hong Kong.
• The meaning of Hong Kong resident entity will apply retrospectively from 1 January 2024.

Filing of top-up tax return

• An in-scope MNE group, whether headquartered in or outside Hong Kong, can designate one Hong Kong constituent entity (“designated local entity”) to file the top-up tax return such that all other Hong Kong constituent entities of the group will be relieved from their filing obligation.
• To be filed no later than 15 months after the last day of the reporting fiscal year.

Filing of top-up tax notification

• An in-scope MNE group, whether headquartered in or outside Hong Kong, can appoint one designated local entity to file a top-up tax notification so as to relieve other Hong Kong constituent entities from the filing obligation.
• To be filed within 6 months after the end of the fiscal year.

Penalty

• The filing entity will be liable on conviction to a fine at level 5 (i.e. HK$50,000), and the court may order the entity to file the top-up tax return or top-up tax notification within a specified period of time. In case of a continuing offence after conviction, a further fine of HK$500 will be imposed on the filing entity for each day of offence. The filing entity will also commit an offence for failing to comply with the court order and will be liable on conviction to a fine at level 6 (i.e. HK$100,000).

Effective fiscal year

The global minimum tax (i.e. IIR and UTPR) and HKMTT will take effect for a fiscal year beginning on or after January 1, 2025.

For more information, please contact Ms. Amie Cheung at amie.cheung@lccpa.com.hk

About Lawrence Cheung CPA:

Lawrence Cheung C.P.A. Company Limited (LCCPA) is Alliott Global Alliance’s accounting, audit, and tax representative in Hong Kong. Founded in 1978, Lawrence Cheung C.P.A. Company Limited (LCCPA) is a professional accounting firm registered under the Professional Accountants Ordinance with the Hong Kong Institute of Certified Public Accountants. LCCPA is a leading firm of certified public accountants ("CPA") and business advisers providing an integrated range of services with a commitment to excel in all practice areas. Their portfolio of clients is diverse ranging from SMEs, regulated entities under Securities and Futures Ordinance to multi-national corporations. Their directors are ex-Big-four accountants with extensive experiences in audits of both Hong Kong and overseas private and listed companies, taxation, business advisory, computer consultancy, merger and acquisition, company secretary, risk management, initial public floatation, corporate and group restructuring exercises.