Hong Kong bill would revise multinational firm tax and transfer pricing rules

The Hong Kong government on December 29 published a tax bill in its official gazette, proposing to introduce a transfer pricing regime based on international standards and establish an advance pricing arrangement program.

Inland Revenue (Amendment) (No. 6) Bill 2017 also adopts rules requiring transfer pricing documentation, including country-by-country reporting, and otherwise implements the minimum standards set out in the 2015 OECD/G20 base erosion and profit shifting (BEPS) package.

The bill also modifies Hong Kong’s tax concessions for a variety of businesses — including reinsurance, captive insurance, aircraft leasing, shipping, and corporate treasury centers.

Hong Kong’s profits tax concessions for corporate treasury centers, reinsurers, and captive insurers were deemed harmful preferential tax regimes contrary OECD BEPS minimum standards in an October 2017 review conducted by the OECD’s Forum on Harmful Tax Practices.

As a member of the BEPS inclusive framework, Hong Kong agreed to adopt all four BEPS minimum standards, namely, countering harmful tax practices, preventing tax treaty abuse, imposing a country-by-country reporting requirement, and improving cross-border dispute resolution. The government has stated that implementing these standards is a top priority.

“Implementing the BEPS package will demonstrate Hong Kong’s commitment to combating cross-border tax evasion. This is particularly crucial for Hong Kong to preserve our competitiveness and reputation as an international financial and business center,” a government spokesman said.

A Hong Kong government consultation conducted in late 2016 revealed broad support for this implementation strategy, the spokesman added.

The Hong Kong tax and transfer pricing bill will be introduced into the Legislative Council on January 10, the government said.

A second bill published that day, Inland Revenue (Amendment) (No. 7) Bill 2017, would set up a two-tier tax system benefiting small business. The rate of profits for tax years beginning after April 1, 2018 would be lowered to 8.25 percent for profits below HK$2 million.