28 June 2016 International Tax and TP Alert Hong Kong s OECD BEPS Associate status requires implementation of BEPS minimum standards Executive summary On 20 June 2016, Hong Kong announced that it will join the inclusive framework for the global implementation of the Organisation for Economic Co-operation and Development s (OECD) Base Erosion and Profit Shifting (BEPS) project through becoming a BEPS Associate. As a BEPS Associate, Hong Kong will work with other participating jurisdictions to facilitate consistent implementation of measures under the BEPS project and a level playing field across jurisdictions. Hong Kong is committed to implementing the four minimum standards under BEPS, namely: Action 5: Countering harmful tax practices Action 6: Preventing treaty abuse Action 13: Transfer pricing documentation Action 14: Enhancing dispute resolution This announcement is in line with the statements made earlier this year by the Hong Kong Financial Secretary as part of the 2016/2017 budget speech, where it was noted that Hong Kong is obliged to implement the BEPS project recommendations. It was further stated that the Hong Kong Government is committed to modernizing its tax legislation to ensure: Hong Kong maintains a fair tax environment; tax system alignment with international standards; and enhanced competitiveness.
Hong Kong s OECD BEPS Associate status requires implementation of BEPS minimum standards 2 Detailed discussion Background On 23 February 2016, the OECD announced a new framework that allows all interested countries and jurisdictions to join efforts to update the international tax rules for the 21st Century. The proposal for broadening participation in the OECD/G20 BEPS project was presented to G20 Finance Ministers on 26 and 27 February 2016 in Shanghai, China and was welcomed by the G20 Finance Ministers and Central Bank Governors at their meeting of 14 and 15 April 2016 in Washington DC. This new forum will provide for all interested countries and jurisdictions to participate as BEPS Associates in an extension of the OECD s Committee on Fiscal Affairs (CFA). As BEPS Associates, the participating countries will work on an equal footing with the OECD and G20 members on the remaining standard-setting under the BEPS project, as well as the review and monitoring of the implementation of the BEPS package. BEPS Associates will also access capacity-building support for the implementation process, including guidance on developing Action Plans for BEPS implementation. The framework s mandate plans to focus on the review of implementation of the four BEPS minimum standards, in the areas of harmful tax practices, tax treaty abuse, transfer pricing documentation and improvements in cross border tax dispute resolution. The first meeting of the CFA, including the new BEPS Associates, will be held in Kyoto, Japan, on 30 June and 1 July 2016. Hong Kong s position Hong Kong Financial Services and the Treasury Bureau (FSTB) announced that it will join the inclusive framework for the global implementation of the BEPS project and work with other jurisdictions to help develop the implementation and monitoring phase. Hong Kong is committed to implementing the four minimum standards. Hong Kong s announcement indicates that the timing of implementation of the BEPS measures will be subject to the time required for legislative amendments. The timelines will be determined based on the characteristics of the domestic tax regime, the envisaged magnitude of legislative changes involved and the practical need to prioritize among the BEPS measures. The Government will conduct an analysis on the BEPS package in order to map out the priorities among the BEPS measures. In this regard, the Deputy Commissioner of the Hong Kong Inland Revenue Department (IRD) had indicated earlier this year 1 that transfer pricing initiatives and developing a multilateral instrument to implement BEPS treaty-related measures would potentially be treated as a high priority. The recent announcement to join the inclusive framework also highlights a significant focus on introducing a mechanism for the automatic exchange of information (AEOI) in relation to tax matters, in order to meet Hong Kong s pledge to commence the first information exchange by the end of 2018. Key impact on Hong Kong Transfer pricing documentation. Hong Kong adheres to the internationally agreed arm s length principle based on the OECD Guidelines. Currently there is no requirement to prepare contemporaneous transfer pricing documentation (as there is in, e.g., mainland China). There is, however, an expectation that appropriate transfer pricing documentation will be made available under an audit or investigation. With the increased focus on transfer pricing as part of the BEPS measures, there is a higher likelihood that there may be more explicit documentation requirements in Hong Kong, such as adopting the OECD s recommended Master File/Local File framework, including the preparation of a Country-By-Country Report. 1 As part of the Annual Tax Conference that was organized by the Association of Chartered Certified Accountants (ACCA) on 30 April 2016.
Hong Kong s OECD BEPS Associate status requires implementation of BEPS minimum standards 3 Treaty abuse. As Hong Kong grows its treaty network, the focus on preventing treaty abuse and implementing measures that meet evolving international standards will increase. Exchange of information will also be a key priority, with mechanisms already being put in place for the AEOI in relation to tax matters. Hong Kong is currently part of a group of jurisdictions working together under the aegis of the OECD and G20 to develop a multilateral instrument for incorporating BEPS measures into existing bilateral treaties to counter treaty abuse. The Ad Hoc Group (which now includes 96 jurisdictions) that is developing the multilateral instrument aims to conclude its work and have the multilateral instrument ready for signature by 31 December 2016. Countering harmful tax practices. The BEPS project has placed priority and renewed focus on requiring substantial activity for any preferential regime and on improving transparency, which may require more detailed disclosures on Hong Kong based entities. It is worth noting that the OECD s work on countering harmful tax practices has also focused on improving transparency through the compulsory spontaneous exchange of certain rulings in the following five clearly defined risk categories pursuant to agreed deadlines and in an agreed format: Rulings on preferential regimes Unilateral advance pricing agreements or cross border unilateral rulings with respect to transfer pricing Cross border rulings providing for a downward adjustment of taxable profits Permanent establishment rulings Related party conduit rulings Enhancing dispute resolution. As a BEPS Associate, Hong Kong will have to work closely with other jurisdictions to monitor the implementation of minimum standards on dispute resolution developed under the BEPS Project. This will complement the other BEPS minimum standards and facilitate that taxpayers have access to effective and expedient dispute resolution mechanisms under bilateral tax treaties. Implications By joining the inclusive framework, Hong Kong has committed to adopting the minimum standards under the aforesaid four BEPS measures. Other BEPS measures concerning transfer pricing under BEPS Action Plans 8, 9, 10 as well as Action 13 were approved on 23 May 2016 by the OECD Council for incorporation into the revised OECD Transfer Pricing Guidelines, formally elevating the status of these BEPS measures. Notwithstanding the above, further refinements to Hong Kong s tax system may still be needed for it to fully adhere to the BEPS recommendations. It remains to be seen whether and how Hong Kong will adopt the remaining BEPS measures. As a BEPS Associate, Hong Kong can work with other participating jurisdictions to facilitate the consistent implementation of measures under the BEPS project, and a level playing field across participating jurisdictions. Joining this inclusive framework demonstrates Hong Kong s intention to meet the key principles underlying the BEPS project, which is important in retaining the status of Hong Kong as a robust business location and to maintain its reputation. With these BEPS changes (particularly around transparency), there will inevitably be additional burdens placed on taxpayers around reporting and indeed reviewing their operating models to facilitate compliance with the new international standards. However, improving Hong Kong s reputation as an internationally compliant player, particularly in a world now characterized by greater transparency, will likely result in higher benefits or lesser challenges from other tax authorities to businesses who would like to access Hong Kong s simple and attractive tax regime. Taxpayers should be reminded that BEPS goes beyond tax. The new global tax environment, being driven by the focus on BEPS, touches every aspect of the business organisation, including holding structures, operating models, IT infrastructure, human resource mobility, financing arrangements, etc. Any taxpayers with international operations, whether large or small, need to navigate the BEPS journey carefully in addressing the competing business and tax pressures.
Hong Kong s OECD BEPS Associate status requires implementation of BEPS minimum standards 4 Contact us Transfer Pricing Services Curt Kinsky Partner, EY Asia-Pacific Area Transfer Pricing Leader +852 2629 3098 curt.kinsky@hk.ey.com Martin Richter Partner, Hong Kong Transfer Pricing Leader, +852 2629 3938 martin.richter@hk.ey.com Kenny Wei Partner, Transfer Pricing +852 2629 3941 Kenny.wei@hk.ey.com Justin Kyte Partner, Hong Kong Financial Services Transfer Pricing Leader +852 2629 3880 justin.kyte@hk.ey.com Cherry Lam Partner, +852 2849 9563 cherry-lw.lam@hk.ey.com James Badenach Partner, Financial Services - Leader +852 2629 3988 james.badenach@hk.ey.com Jacqueline Bennett Partner, Financial Services - +852 2849 9288 jacqueline.bennett@hk.ey.com Adam Williams Partner, Financial Services - +852 849 9589 adam-b.williams@hk.ey.com
Hong Kong s OECD BEPS Associate status requires implementation of BEPS minimum standards 5 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organisation, please visit ey.com. 2016 Ernst & Young, China All Rights Reserved. APAC no. 03003477 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/china