All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

The impact of BEPS on tax incentives in Hong Kong SAR

Sponsored by sponsored-firms-kpmg.png
Significant changes expected in response to the BEPS 2.0 reform

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.  

Key considerations 

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.  

 

Lewis Lu

Partner, KPMG China

E: lewis.lu@kpmg.com

 

John Timpany

Partner, KPMG China

E: john.timpany@kpmg.com

 

More from across our site

ITR is delighted to reveal all the shortlisted firms, teams and practitioners – winners will be announced on August 25
Multinational enterprises run the risk of hefty penalties if the company in question fails to register for VAT when providing electronic services in South Africa.
Tax directors have urged companies to ensure they have robust tax risk management controls when outsourcing tax functions.
Japan reports a windfall from all types of taxes after the government revised its stimulus package. This could lead to greater corporate tax incentives for businesses.
Sources at Netflix, the European Commission and elsewhere consider the impact of incoming legislation to regulate tax advice in the EU – if it ever comes to pass.
This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree