Global minimum tax and Hong Kong minimum top-up tax for multinational enterprise groups

• Global minimum tax and Hong Kong minimum top-up tax for multinational enterprise groups
• Pillar Two of BEPS 2.0
• Implementation framework in Hong Kong
  • Interpretation consistent with the OECD GloBE rules documents
  • In-scope MNE groups
  • Top-up tax
  • Location of an MNE entity
  • Charging mechanism of the GloBE rules
  • Charging mechanism of HKMTT
  • Nature of top-up tax
  • Safe harbours
  • Tax compliance and administration
• Qualified rule status
• More information
• Enquiries

 

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Pillar Two of BEPS 2.0

Under Pillar Two of BEPS 2.0, a global minimum tax of 15% is imposed on multinational enterprise (MNE) groups with annual consolidated revenue of EUR 750 million or above in at least two of the four fiscal years immediately preceding the current fiscal year (i.e. in-scope MNE groups) through two interlocking rules, namely: 

• Income Inclusion Rule (IIR) –  the primary rule which imposes top-up tax on the parent entity of an in-scope MNE group in respect of its constituent entities which are taxed at an effective tax rate (ETR) below 15% (i.e. low-taxed constituent entities) outside the jurisdiction where the parent entity is located; and
• Undertaxed Profits Rule (UTPR) – a backstop to IIR which ensures that all top-up tax is charged where any of such tax is not brought into charge under IIR.

The two rules are together referred to as the Global Anti-Base Erosion (GloBE) rules.  They seek to ensure that in-scope MNE groups pay a minimum tax of 15% in respect of the profits derived from every jurisdiction in which they operate, thereby reducing the incentive for large MNE groups to shift profits to low- or no-tax jurisdictions to reduce tax.  They also place a floor under tax competition, where jurisdictions lower their corporate income tax rates to compete for capital and investment.

The GloBE rules allow jurisdictions to introduce their own qualified domestic minimum top-up tax (QDMTT) based on the GloBE mechanics.  A jurisdiction in which an in-scope MNE group operates and for which the ETR is below the minimum rate (i.e. a low-tax jurisdiction) has the first priority to collect the top-up tax in respect of the low-taxed constituent entities in its own jurisdiction if it has implemented its own QDMTT; otherwise, the top-up tax will be collected by another jurisdiction through the imposition of IIR or UTPR.  

 

Implementation framework in Hong Kong

To implement the GloBE rules in Hong Kong, the GloBE Model Rules promulgated by the OECD, which set out the detailed terms of the global minimum tax, are directly incorporated in the Inland Revenue Ordinance (IRO) with limited and necessary adaptations as far as practicable.  Based on the commentaries and administrative guidances issued by the OECD (OECD GloBE rules documents), provisions on safe harbours, HKMTT and tax administration (other GloBE-related provisions) are also provided for.  

 

Interpretation consistent with the OECD GloBE rules documents

The OECD GloBE rules documents are required to be given effect to in a way that supplements, and clarifies the interpretation and operation of, the GloBE Model Rules as incorporated, and the other GloBE-related provisions under the IRO. This can ensure that the GloBE rules and HKMTT implemented in Hong Kong are consistent with the internationally-agreed-outcomes, and are seen as qualified rules by the OECD.

The key elements of the implementation framework of the GloBE rules and HKMTT are set out as follows:

 

In-scope MNE groups

Following the GloBE Model Rules, the GloBE rules and HKMTT are only applied to in-scope MNE groups.  If an MNE group is within the scope of the GloBE rules, the group must determine the location and income of each constituent entity, and compute the ETR on a jurisdictional basis.  The GloBE income or loss and adjusted covered taxes of each constituent entity located in the same jurisdiction are added together to compute the ETR. 

 

Top-up tax

The top-up tax payable by an in-scope MNE group for a low-tax jurisdiction is the product of:

• the excess profits – the result of the aggregate GloBE income or loss for all constituent entities in the low-tax jurisdiction less a substance-based income exclusion for the low-tax jurisdiction; and
• the top-up tax percentage – the difference between the ETR in the low-tax jurisdiction and the minimum rate of 15%.

 

Location of an MNE entity

It is important to determine whether an entity is located in Hong Kong for the purpose of collecting top-up tax.  Under the GloBE rules, an entity is located where it is a tax resident or was created.  In order to ensure that entities incorporated or constituted in Hong Kong as well as those managed or controlled in Hong Kong (if incorporated or constituted outside Hong Kong) can be regarded as located in Hong Kong for the purposes of the GloBE rules and HKMTT, a definition of “Hong Kong resident entity” is introduced for general purposes of the IRO.  This aligns with the definition generally adopted under Hong Kong’s Comprehensive Avoidance of Double Taxation Agreements or Arrangements (CDTAs).  An entity is a tax resident in Hong Kong if: 

• where an entity is a company – the entity is incorporated in Hong Kong or, if incorporated outside Hong Kong, normally managed or controlled in Hong Kong; or
• in any other case – the entity is constituted under the laws of Hong Kong or, if otherwise constituted, normally managed or controlled in Hong Kong.

The above definition takes retrospective effect from 1 January 2024.  This allows an entity that falls within the definition to be regarded as located in Hong Kong throughout the fiscal year 2024, thereby minimising its exposure to top-up tax in other jurisdictions which have implemented the GloBE rules for an accounting period beginning on or after 1 January 2024.

 

Charging mechanism of the GloBE rules

IIR

Under the IIR, top-up tax is imposed on the ultimate parent entities (UPEs) of in-scope Hong Kong-headquartered MNE groups, Hong Kong intermediate parent entities of in-scope foreign-headquartered MNE groups the UPEs of which are located in jurisdictions that do not implement IIR, or Hong Kong partially-owned parent entities of in-scope MNE groups irrespective of whether the UPEs or the intermediate parent entities are required to apply IIR.   These parent entities are charged the IIR top-up tax based on their ownership interests in their low-taxed constituent entities located outside Hong Kong.  Apart from the low-taxed constituent entities located outside Hong Kong, joint ventures, subsidiaries of joint ventures and stateless constituent entities (collectively other entities) of in-scope MNE groups located or operated in low-tax jurisdictions outside Hong Kong may render the MNE groups liable to the IIR top-up tax in Hong Kong.

The IIR top-up tax is payable in relation to a fiscal year beginning on or after 1 January 2025.

UTPR

Under the UTPR, top-up tax is imposed by way of an equivalent adjustment in the form of an additional tax.  The UTPR top-up tax allocated to Hong Kong is charged on Hong Kong constituent entities of an in-scope MNE group, based on the respective proportion of the employee headcount and the value of tangible assets, unless the group designates one or more than one Hong Kong constituent entities to pay the UTPR top-up tax.  

The UTPR is to be implemented on a date to be specified by the Secretary for Financial Services and the Treasury at a later stage.  

 

Charging mechanism of HKMTT

The HKMTT operates consistently with the GloBE rules and imposes top-up tax on low-taxed constituent entities and other entities of in-scope MNE groups located or operating in Hong Kong, in priority over the IIR and UTPR.  Investment entities and insurance investment entities are excluded from the scope of HKMTT so as to preserve their tax neutrality.  The HKMTT is allocated among and charged on the Hong Kong constituent entities of an in-scope MNE group in proportion to each entity’s GloBE income, unless the group designates one or more than one Hong Kong constituent entities to pay the HKMTT.

The design of HKMTT aims to meet the requirements of a QDMTT so that the top-up tax paid under HKMTT is creditable against the top-up tax imposed under the GloBE rules.  If certain conditions are met, in-scope MNE groups can benefit from the QDMTT Safe Harbour, which deems the GloBE top-up tax payable by the group in Hong Kong as zero, thereby relieving the group from undertaking GloBE computation for Hong Kong and reducing its tax compliance burden.  

The HKMTT is payable in relation to a fiscal year beginning on or after 1 January 2025.

 

Nature of top-up tax

The top-up tax imposed in Hong Kong under the GloBE rules and HKMTT is deemed as profits tax.  Doing so allows the relevant tax administration mechanisms, such as tax collection, handling of objections and appeals, etc., currently under the IRO to be applied to the top-up tax.  In-scope MNE groups can also ride on the mutual agreement procedure mechanisms under Hong Kong’s CDTAs for resolving relevant cross-border disputes where applicable.

 

Safe harbours

The OECD has developed safe harbours to relieve in-scope MNE groups from performing full GloBE calculations when certain conditions are met.  The transitional Country-by-Country Reporting Safe Harbour, the transitional UTPR Safe Harbour, the QDMTT Safe Harbour and the Simplified Calculations Safe Harbour for non-material constituent entities are provided in Hong Kong so as to reduce compliance burden for in-scope MNE groups.  

 

Tax compliance and administration

To ease compliance burden, the reporting and administrative requirements of the GloBE rules and HKMTT are aligned as far as practicable.  Also, the tax administration framework of the GloBE rules and HKMTT rides on certain administrative provisions of the IRO, with necessary modifications, to deal with the objection and appeal procedures, collection and recovery tax, etc.

The key elements of the tax administration framework are set out as follows:  

Filing of top-up tax return

Each Hong Kong constituent entity of an in-scope MNE group is required to furnish a single top-up tax return for the purposes of the GloBE rules and HKMTT (top-up tax return) in a prescribed manner and form no later than 15 months after the last day of the reporting fiscal year.  The filing deadline for the first transition year of any constituent entities of the MNE group is extended to 18 months.  The top-up tax return includes information required in the standardised GloBE Information Return (GIR).  Hong Kong constituent entities of an in-scope MNE group will be relieved from the obligation to file the GIR information if such information is filed in a jurisdiction that will be able to exchange GIR information with Hong Kong under a qualifying competent authority agreement.

To provide flexibility for filing of returns, an in-scope MNE group is allowed to designate one Hong Kong constituent entity (designated local entity) to file the top-up tax return to the Inland Revenue Department (IRD) such that all other Hong Kong constituent entities of the group will be relieved from their filing obligation.  The designated local entity needs to be appointed annually and the appointment remains valid in respect of the reporting fiscal year concerned. 

Filing of top-up tax notification

Each Hong Kong constituent entity of an in-scope MNE group is required to file an annual notification (top-up tax notification) relating to its obligations of filing top-up tax return in a prescribed form and manner.  The top-up tax notification is required for notifying the IRD that an MNE group has come within the scope of the global minimum tax and HKMTT, as well as identifying the entity and jurisdiction from which Hong Kong will receive the GIR and the local entities for which the obligation to file the top-up tax return will be lifted when certain conditions are met.  A top-up tax notification is required to be filed within six months after the last day of the reporting fiscal year.  Similar to the arrangement provided in the filing of top-up tax return, an in-scope MNE group is allowed to appoint one designated local entity to file a top-up tax notification so as to relieve other Hong Kong constituent entities from the filing obligation.

Assessment and demand for top-up tax

A notice of assessment and demand for top-up tax is to be issued based on the information declared upon the filing of the top-up tax return.  No provisional top-up tax is charged.  The payment due date is one month after the expiry of the return filing deadline or the date of the notice of assessment, whichever is the later.

In accordance with the GloBE rules, the IIR top-up tax is charged on the parent entities of in-scope MNE groups.  In respect of the UTPR top-up tax or HKMTT, under the default allocation mechanism for top-up tax, each constituent entity is only liable for its share of top-up tax.  To provide flexibility for payment of top-up tax, the group is allowed to designate one paying entity or more.  However, if any of the designated paying entity does not pay the top-up tax payable, all Hong Kong constituent entities will be jointly and severally liable for the whole amount of top-up tax payable of the group.

The objection period to a top-up tax assessment is two months after the date of the notice of assessment.

Penalty for non-compliance

A comparable level of penalty is imposed for non-compliance with the reporting and administrative requirements, including the failure to file a top-up tax return or top-up tax notification, and wrongdoings in relation to incorrect return and notification, etc., as currently imposed under the existing penal provisions in relation to profits tax under sections 80, 82 and 82A of the IRO.  A service provider who is engaged to file a top-up tax return or top-up tax notification for a filing entity is also subject to similar penalties as currently imposed for service providers in relation to filing of a profits tax return under section 80K of the IRO. 

Anti-avoidance provision

The general anti-avoidance provisions under sections 61 and 61A of the IRO were specifically enacted to tackle tax avoidance within the existing framework of the IRO and do not apply to the GloBE and HKMTT regimes.  To maintain the integrity of the GloBE and HKMTT regimes and to tackle abusive or avoidance schemes for the purposes of the GloBE or HKMTT regime, the main purpose test is introduced and is only applied in consistency with the OECD GloBE rules documents.  If a person enters into any arrangements for the main purpose of avoiding the relevant obligations such as filing and payment of top-up tax, those arrangements will be treated as if they had never been entered into. 

Application to MNE entities other than Hong Kong constituent entities

In general, the tax administration framework also applies to other entities (i.e. joint ventures, subsidiaries of joint ventures or stateless constituent entities) of in-scope MNE groups located or operating in Hong Kong in the same way as it applies to Hong Kong constituent entities.

 

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Qualified rule status

The IIR, UTPR and HKMTT, as well as the QDMTT Safe Harbour, in Hong Kong must be implemented in a way which achieves consistent outcomes with the GloBE Model rules and OECD GloBE rules documents such that the relevant qualified rule status can be obtained during the OECD’s peer review process. This seeks to ensure the effectiveness of the GloBE rules underpinned by the consistent application of the rules across jurisdictions.

 

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More information

Inland Revenue Ordinance

• The Amendment Bill

OECD materials

The OECD materials relating to the GloBE Model Rules are listed below for reference: 

• GloBE Model Rules
• Commentary to the GloBE Model Rules
• Administrative Guidances on the GloBE Model Rules
• Illustrative Examples on the GloBE Model Rules
• GloBE Information Return

The Inclusive Framework on BEPS will continue to release further guidance materials on an ongoing basis to ensure a consistent and common interpretation of the GloBE rules. For more information, please refer to the OECD’s website.

 

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Enquiries 

If you have any question on the global minimum tax or Hong Kong minimum top-up tax, please contact us at beps2.0@ird.gov.hk.