By Clare Chang, Managing Director, Greater China
In a move that signals a major shift in international taxation, the Hong Kong Government gazetted a new bill on 27 December 2024 – the Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Bill 2024. This landmark legislation implements the international tax reform framework, Base Erosion and Profit Shifting (BEPS) 2.0, set by the Organisation for Economic Cooperation and Development (OECD), to align Hong Kong’s tax system with global standards.
Under BEPS 2.0, large multinational enterprise (MNE) groups need to pay a minimum tax rate of 15% on their profits. The bill targets high-revenue entities operating across multiple jurisdictions. In this article, we discuss the scope of the bill, its key attributes and implementation timeline, as well as practical and strategic implications for impacted firms.
Scope and applicability
The bill applies to MNE groups that:
- Revenue threshold: Have an annual consolidated revenue of at least €750 million in two or more of the four fiscal years preceding the current fiscal year
- Global operations: Operate across various jurisdictions, to ensure all profits are taxed at an effective rate of at least 15%
By focusing on large, high-revenue MNEs, the bill aims to close tax loopholes that allow such entities to shift profits to low-tax jurisdictions. This move underscores Hong Kong’s commitment to fostering a fairer and more transparent global tax environment.
Key provisions and implementation timeline
1. Income Inclusion Rule (IIR)
- Imposes a top-up tax on the parent entity for income earned by low-taxed subsidiaries within the group
- Ensures the effective tax rate (ETR) for these entities aligns with the 15% minimum threshold, thereby minimising tax avoidance opportunities
- Effective for fiscal years beginning on or after 1 January 2025
2. Undertaxed Profits Rule (UTPR)
- Allocates residual top-up taxes to jurisdictions where the IIR does not fully apply, particularly when the parent entity is located in a non-IIR jurisdiction
- Strengthens the global enforcement of the minimum tax rules by ensuring tax obligations are distributed equitably among relevant jurisdictions
- The activation date will be announced by the Secretary for Financial Services and the Treasury at a later time
3. Hong Kong Minimum Top-up Tax (HKMTT)
- Introduces a domestic mechanism to ensure income generated in Hong Kong meets the 15% ETR requirement
- Aligns with the OECD’s Qualified Domestic Minimum Top-up Tax (QDMTT), offsetting any obligations arising under the IIR or UTPR frameworks
- Protects Hong Kong’s taxing rights by ensuring that any top-up tax is paid locally rather than in foreign jurisdictions.
- Effective from 1 January 2025
4. Alignment with OECD GloBE Rules
- The bill incorporates the OECD’s Global Anti-Base Erosion (GloBE) Model Rules to provide uniform interpretation and application
- Promotes consistency across jurisdictions, reducing compliance burdens for MNEs with global operations
Administrative and compliance measures
The bill introduces comprehensive measures to ensure compliance and streamline administration:
1. Filing and reporting obligations
- Detailed tax returns: In-scope MNEs must submit returns specifying their top-up tax liabilities under the IIR, UTPR and HKMTT
- Information disclosure: Entities are required to provide data on income, taxes paid, and other relevant metrics to determine effective tax rates
2. Penalties for non-compliance
- Delayed or incomplete filings: Fines are imposed for failing to meet filing deadlines or providing insufficient information
- Misrepresentation: Entities making false or misleading statements face substantial penalties, including fines and sanctions
- Service provider accountability: Penalties extend to tax service providers who fail to fulfill their obligations accurately
3. Transitional and safe harbour provisions
- Part 3 of Schedule 60 outlines transitional rules and safe harbours to ease the adjustment period for affected entities
- Temporary relief measures are available to help MNEs transition to the new tax regime without undue burden
4. Support and guidance
- The Inland Revenue Department (IRD) has established a dedicated team to provide technical support and answer taxpayer queries
- Comprehensive online resources, including detailed guidance documents, will be made available to address common challenges
Strategic implications for MNEs
The introduction of the global minimum tax represents a significant shift in international taxation, requiring proactive adjustments from affected MNEs. Key considerations include:
1. Tax structure review
- Conduct a thorough review of existing tax arrangements to identify vulnerabilities under the new rules
- Evaluate the financial impact of the IIR, UTPR and HKMTT on overall profitability and cash flow
2. Strengthen compliance capabilities
- Enhance internal tax functions and reporting systems to meet the stringent requirements of the new framework
- Collaborate with experienced tax advisors to ensure compliance and optimise tax positions
3. Leverage transitional relief
- Assess eligibility for transitional and safe harbour provisions to minimise compliance burdens during the initial implementation phase
- Use these provisions strategically to streamline the adjustment process
4. Monitor global tax developments
- Stay informed about evolving international tax regulations and practices to anticipate cross-border tax implications
- Align group-wide tax strategies with the OECD’s global standards to ensure consistency and compliance
5. Engage with stakeholders
- Maintain open communication with local tax authorities and stakeholders to ensure a smooth transition
- Leverage the IRD’s support resources to address uncertainties and clarify compliance requirements
Looking ahead
Hong Kong’s adoption of the 15% minimum tax is not just a local tax reform; it’s a significant change in international taxation. It requires multinational companies to review their tax structures and ensure compliance with the new regulations.
As more countries adopt similar measures, we can expect a more transparent and equitable global tax environment. However, the evolving nature of international tax rules means that businesses must remain vigilant and adapt their strategies accordingly. Continuous monitoring of regulatory changes and proactive engagement with tax authorities will be crucial for navigating this new landscape.
How IQ EQ can help
For specific advice or next steps, speak to IQ-EQ’s expert team in Hong Kong to make sure your business is fully prepared.
We offer a comprehensive suite of services for investment firms including tailored solutions to ensure compliance, optimise tax efficiency, minimise potential risks, and achieve competitive advantage. We have a global network with offices in 25 jurisdictions and use industry-leading technology to deliver efficiency as well as ESG compliance.
