The impact of BEPS on tax incentives in Hong Kong SAR
Lewis Lu and John Timpany of KPMG China discuss the impact of BEPS on Hong Kong SAR tax incentives and businesses operating in Hong Kong SAR.
As of November 4 2021, 137 out of 141 member jurisdictions of the G20/OECD Inclusive Framework on BEPS (IF) have agreed to the statement issued by the IF on October 8 2021, which set out the building blocks and key rates for pillar one and pillar two of the BEPS 2.0 reform.
Many jurisdictions across the ASPAC region, including Hong Kong SAR, offer a range of tax incentives to attract business and investment. However, the introduction of a global minimum tax of 15% under pillar two raises questions as to the appeal and future of such tax incentives.
The global minimum tax may reduce the effectiveness of tax incentives and disincentivise jurisdictions to introduce tax concessions if another jurisdiction can claw back that benefit.
Although the headline corporate tax rate in Hong Kong SAR is 16.5%, Hong Kong SAR offers a wide range of income exclusions/exemptions, tax incentives and enhanced deductions which could reduce a group’s overall effective tax rate in Hong Kong SAR below the agreed 15% global minimum tax rate under pillar two.
These include: (i) non-taxation of foreign-sourced income under the territorial tax system; (ii) non-taxation of capital gains; (iii) tax exemption for bank interest income and profits from qualifying debt instruments; (iv) a concessionary tax rate of 8.25% for qualifying profits earned by taxpayers in specific sectors (e.g. insurance, aircraft leasing and corporate treasury centres); (v) a concessionary tax rate of 0% for certain ship leasing business and carried interest and (vi) enhanced tax deductions for qualifying research and development expenditure.
For large foreign-headquartered multinational enterprise (MNE) groups with presence in Hong Kong SAR, the tax incentive benefits enjoyed by their Hong Kong entities may be neutralised by: (i) the adoption of the income inclusion rule (IIR) by the parent jurisdiction; or (ii) a possible introduction of a domestic minimum regime (DMT) in Hong Kong SAR.
For those large Hong Kong SAR headquartered MNE groups that have group entities enjoying a tax incentive in the Hong Kong SAR or in an overseas jurisdiction, the benefits from such tax incentives may be neutralised by the possible introduction of a DMT and the adoption of the IIR in the Hong Kong SAR respectively. That said, out-of-scope MNE groups can continue to enjoy the benefits from tax incentives offered by Hong Kong SAR.
Both Hong Kong SAR and foreign headquartered MNE groups with cross-border related party payments made to Hong Kong SAR entities will also need to consider the possible impact of the subject to tax rule if the gross amounts of such payments are taxed at a rate below the agreed nominal rate of 9%.
In addition to the significant changes expected to be brought to the Hong Kong SAR tax system as a response to the BEPS 2.0 reform, the inclusion of Hong Kong SAR in the EU’s tax ‘grey list’ following its review of Hong Kong SAR’s territorial source regime also means changes will need to be made to the regime in respect of passive income.
Affected businesses will need to start assessing and modelling the impact of all these upcoming changes and consider whether any business restructuring will be desirable.
Opportunities may arise to relocate operations from other foreign jurisdictions with high taxed profits to Hong Kong SAR to blend with any pre-existing Hong Kong SAR low taxed profits. This may result in simplified group structures or transaction flows while preserving pre-existing Hong Kong SAR tax incentive benefits.
Partner, KPMG China
Partner, KPMG China