The Hong Kong SAR government held a public consultation on the implementation of a global minimum tax and a Hong Kong minimum top-up tax (HKMTT) during the period 21 December 2023 and 20 March 2024. The consultation paper set out the government’s position and preferred approach to implementing the OECD global anti-base erosion (GloBE) rules and the HKMTT and sought the public’s views on the administrative framework of the GloBE rules and the design and implementation of the HKMTT. The consultation paper asked stakeholders to help identify uncertainties that could be clarified in the law or the IRD’s administrative guidance in areas of: charging provisions; calculation of the effective tax rate and top-up tax; transition and simplification rules; tax compliance and administration; and mandatory electronic filing of profit tax returns through a designated system for a year of assessment beginning on or after 1 April 2025.
The following summarises the proposed global minimum tax and HKMTT rules as currently drafted:
Hybrid legislative approach
The government will adopt a hybrid legislative approach by directly incorporating the GloBE rules into the Inland Revenue Ordinance (Chapter 112) (IRO), with limited adaptations to the extent practical. The enacted GloBE rules will have to be read and applied in the way that best secures consistency with the requirements and guidance in the OECD’s Commentary and Administrative Guidance in force immediately before enactment.
Effective date
The global minimum tax and HKMTT will take effect for fiscal years beginning on or after 1 January 2025.
In-scope MNE groups
MNE groups with consolidated annual revenue of, or above, EUR 750 million (denominated in Euros rather than the Hong Kong dollar equivalent) in at least two of the previous four fiscal years will fall within the scope of the GloBE rules and the HKMTT. Smaller MNE groups and purely domestic groups are excluded. All Hong Kong resident entities of an in-scope MNE group, whether headquartered in or outside Hong Kong, and that are or would have been included in the group consolidated financial statements, will be subject to the HKMTT.
Definition of Hong Kong resident
For the purposes of the GloBE rules and HKMTT, the government proposes that an entity incorporated/constituted in Hong Kong or, if incorporated/constituted outside Hong Kong but normally managed or controlled in Hong Kong, is a Hong Kong resident entity. This definition will apply retroactively as from 1 January 2024.
GloBE rules and the government’s positions on implementation of a top-up tax
The Hong Kong SAR government will closely follow the GloBE rules to ensure that the rules implemented will be considered qualified rules in the OECD’s peer review process. The steps for charging the top-up tax are as follows:
Step 1: Determine whether an MNE group is in scope
Step 2: Determine the income and taxes of group members (constituent entities, or CEs)
Step 3: Calculate the group’s effective tax rate in the jurisdiction and determine the amount of top-up tax in that jurisdiction
Step 4: Allocate the top-up tax to the group’s CEs within that jurisdiction
Step 5: Impose a top-up tax under the Income Inclusion Rule (IIR) or Undertaxed Profits Rule (UTPR) in accordance with the agreed rule order
Introduction of HKMTT
The government plans to implement the HKMTT to safeguard its taxing rights and alleviate compliance burdens on in-scope MNE groups due to paying top-up tax under the IIR or UTPR in respect of every operating jurisdiction. The HKMTT is intended to be a Qualified Domestic Minimum Top-up Tax (QDMTT) and satisfy the QDMTT safe harbour.
Transition rules, safe harbours and simplifications
The government proposes to adopt optional transition provisions under the GloBE rules that will apply for a period when an MNE group first becomes in scope, covering topics of losses and timing differences, higher SBIE, filing deadlines, etc. The government also proposes to provide a transitional country-by-country reporting (CbCR) safe harbour for the purpose of the GLoBE rules and a permanent QDMTT safe harbour to reduce the burden in complying with the detailed computational requirements of the GloBE rules.
Tax compliance
The government proposes that, for a reporting fiscal year starting on or after 1 January 2025, each Hong Kong CE of an in-scope MNE group will be required to:
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Electronically file an annual notification (top-up tax notification) relating to its obligation to file a top-up tax return. The notification will have to be filed within six months after the end of the fiscal year; and
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Electronically furnish a single top-up tax return for purposes of the GloBE rules and HKMTT (top-up tax return) no later than 15 months after the last day of the reporting fiscal year (extended to 18 months within the transition year).
An in-scope MNE group will be able to designate one Hong Kong CE (designated local entity) to file the top-up tax notification and top-up tax return to the Inland Revenue Department (IRD).
The IRD will develop an electronic platform to allow the submission of notifications and returns.
A notice of assessment of the top-up tax will be issued based on the information contained in the top-up tax return. No provisional top-up tax will be charged. The date for the payment of the top-up tax will likely be set two weeks from the date of the notice of assessment.
Administration and penalties
For the purposes of GloBE rules and HKMTT, the existing administrative provisions of the IRO will apply, with necessary modifications to deal with the recordkeeping, objection procedures, collection and recovery of tax, and anti-avoidance issues, etc. Similarly, penalties under the existing IRO administrative provisions will apply to a filing entity and service provider for failure to file the top-up tax return or top-up notification or filing an incorrect top-up tax return and top-up tax notification without a reasonable excuse or filing willfully with intent to evade tax (imprisonment also would apply in the latter case).
Failure to file the top-up tax return or top-up notification as required without a reasonable excuse will be considered a “Level 5 offence.” In the case of a continuing offence after conviction, a further fine of HKD 500 will be imposed for each day of offence. Failure to comply with a court order to rectify such an offence will be liable on conviction to a fine at “Level 6.”
BDO observations
The adoption of the GloBE rules and introduction of the HKMTT will represent a significant change in Hong Kong’s tax system. The final rules will need to consider how certain aspects of the GloBE rules interact with Hong Kong’s existing territorial basis of taxation. Additionally, the GloBE rules are complex in their current form while also evolving through the issuance of updated administrative guidance by the OECD. Hong Kong will have to consider how to efficiently incorporate international rules (including future guidance) into the IRO.
We welcome the government’s willingness to adopt (transitional and permanent) safe harbours and other simplification provisions that will ease the compliance burden on taxpayers. Additional guidance related to the application of penalties and other practical measures to provide taxpayers with certainty would also be welcomed.
Given the introduction of these rules in Hong Kong and in other jurisdictions, in-scope MNE groups should carefully and proactively assess the impact of the proposed rules on their business and assess the long-term suitability of their existing international tax structures.
Abigail Li
Carol Lam
BDO in Hong Kong