On 13 July 2018, the Hong Kong Government announced the publication of the Inland Revenue (Amendment) (No. 6) Ordinance 2018 in the Official Gazette, which primarily implements the minimum standards of the BEPS project. The main aspects of the Ordinance are summarized as follows:
The OECD's transfer pricing rules are codified into the Inland Revenue Ordinance (IRO) so that both domestic and cross-border transactions between associated enterprises will be taxed on the basis that they are effected at arm's length. This includes reference to the 2017 OECD Transfer Pricing Guidelines and the OECD commentary on the associated enterprises article of the OECD Model Convention.
In general, the rules relating to the computation of income or loss for provision between associated enterprises on an arm's length basis will apply in relation to a year of assessment beginning on or after 1 April 2018, while rules relating to the attribution of income or loss to permanent establishments of non-Hong Kong resident persons as if the permanent establishment were a distinct and separate enterprise will apply in relation to a year of assessment beginning on or after 1 April 2019. Further, rules will apply from 1 April 2019 to ensure that a person carrying out the functions of development, enhancement, maintenance, protection or exploitation (DEMPE) for an IP in Hong Kong will be taxed on the basis of that person's contribution in carrying out such functions.
New provisions are introduced to formularize an advance pricing agreement (APA) regime for unilateral, bilateral, and multilateral APAs. For each application, the applicant is required to pay fees that include a service charge calculated on the basis of each hour spent by IRD officers (capped at HKD 500,000) and payment or reimbursement of other fees or expenses related to the application. The applicant may be demanded to pay a deposit before the application is entertained. The deposit paid will be applied to settle the fees payable upon the determination of the application.
In addition, the fees payable for advance ruling applications are adjusted. The new application fees are HKD 45,000 for a ruling on territorial source principle and HKD 15,000 for a ruling on other matters.
A new Schedule is introduced on the meaning of permanent establishment, including that where there is an applicable tax treaty, the treaty definition of permanent establishment will apply, and where there is not an applicable tax treaty, a definition in line with OECD standards, as provided in the new schedule, will apply. The new Schedule also provides an interpretation of closely related for the purpose of the Schedule, including that a person is closely related to another person if one has control of the other or directly or indirectly holds more than a specified interest in the other, or a third person or enterprise controls or holds more than a specified interest in both persons. Specified interest means 50% of the beneficial interest in a person or, if the person is a company, 50% of the aggregate vote and value of the company's shares or of the beneficial equity interest in the company.
Changes are made in the penalties for failing to make returns, making incorrect returns, etc. This includes a change from a penalty of treble the amount of undercharged tax to just the undercharged amount (level 3 fine maintained – HKD 10,000), as well as new offences for failing to comply with various provisions, including in respect of double taxation and other relief, mutual agreement procedures, advance pricing agreements, and recordkeeping.
Master file and Local file requirements are introduced in line with OECD guidelines for accounting periods beginning on or after 1 April 2018. The documentation must be prepared within 9 months following an accounting period in English or Chinese and kept for at least seven years. Taxpayers are generally required to prepare the documentation if engaged in controlled transactions, with exemptions applying as follows:
Country-by-Country (CbC) reporting requirements are introduced from 1 January 2018. Key points of the requirements are as follows:
A statutory dispute resolution mechanism is introduced to replace the current mechanism that relies on administrative rules in the Departmental Interpretation and Practice Notes of the Inland Revenue Department (IRD). This allows a taxpayer to present a case for MAP and/or arbitration under a relevant tax treaty and provides that the Commissioner must give effect to any solution unilaterally arrived at by the Commissioner or agreement reached with the other tax authority concerned in the course of the MAP or arbitration, and any decision delivered by arbitrators in the case of arbitration.
The tax credit system is enhanced to address double taxation, including:
Certain changes are made with regard to BEPS Action 5 (Countering Harmful Tax Practices). This includes the amendment of the preferential tax regimes for corporate treasury centres (CTC), professional reinsurance, and captive insurance by extending the half-rate concessions of these regimes that applied only to profits derived from foreign transactions to also apply to profits derived from domestic transactions from the year of assessment 2018/19 onwards. Further, the IRD Commissioner is empowered to issue a notice on the introduction of substantial activities requirements in the tax regimes for CTC, professional reinsurers, captive insurers, ship-owners, aircraft lessors and aircraft leasing managers, which will entail detailed thresholds (i.e. minimum number of full-time qualified employees and minimum amount of operating expenditure).
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