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Hong Kong Tax Newsflash

Hong Kong Pillar 2 QDMTT / HKMTT and GloBE Rules consultation

Published date: 21 December 2023

Introduction

On 21 December 2023, the Financial Services and the Treasury Bureau (FSTB) and Inland Revenue Department (IRD) published a consultation on the implementation of the global minimum tax and Hong Kong minimum top-up tax. In the consultation the FSTB and IRD confirmed that Hong Kong would implement the IIR and UTPR as part of a domestic implementation of the GloBE Rules, as well as implementing what is intended to be a qualifying Domestic Minimum Top-up Tax (QDMTT), which will be known in Hong Kong as the Hong Kong Minimum Top-up Tax (HKMTT).

The consultation can be accessed on the FSTB website. We have reviewed the consultation and summarized key aspects of the document in a question and answer format below.

How long is the consultation?

The consultation is 72 pages in length. However, a significant portion of the document is aimed at educating readers on the GloBE Rules and the concept of a QDMTT. Beyond educating readers, the consultation sets out the likely implementation approach of Hong Kong, which is insightful. The document also poses a range of questions to stakeholders.

When will Hong Kong introduce the GloBE Rules and HKMTT?

It is proposed that Hong Kong will introduce an Income Inclusion Rule (IIR), the Undertaxed Profits Rule (UTPR) and HKMTT for a fiscal year beginning on or after 1 January 2025. The consultation does not include a question on timelines. However, these timelines are not inconsistent with other jurisdictions.

Which MNE Groups will be in scope?

MNE Groups with revenue in excess of €750m will be in scope of the GloBE Rules and HKMTT. The €750m threshold will be denominated in Euros rather than a Hong Kong dollar equivalent.

Will Hong Kong include the GloBE Rules and HKMTT in the Inland Revenue Ordinance (IRO) or a separate ordinance?

It is currently proposed that the GloBE Rules and HKMTT will be included in the IRO and treated as profits tax. The document outlines that this approach would help to maintain certainty as a result of leveraging existing and well understand tax administration mechanisms.

What are the key question themes in the consultation?

The GloBE Rules offer jurisdictions a number of legislative options to adopt when implementing a QDMTT. The FSTB and IRD have set out some of their views with regard to these options. However, they have been silent on others. The document seeks feedback on the proposed approaches and invites additional comments. Respondents will likely wish to provide input on all areas of optionality in the implementation of the GloBE Rules and QDMTT.

Beyond the legislative options available to jurisdictions, there are also a substantial number of uncertainties that arise in the administrative guidance that accompanies the GloBE Rules. These arise due to the substantial volume and complexity of the administrative guidance and will complicate the globally consistent administrative of the GloBE Rules and QDMTTs. The consultation seeks stakeholder feedback on these uncertainties which should give the FSTB and IRD an opportunity to clarify these areas. This should lead to the drafting of law with a greater level of certainty, which is ultimately beneficial to all parties.

What is Hong Kong’s approach to legislative drafting?

Different jurisdictions have adopted different styles when implementing the GloBE Rules and QDMTTs. Some jurisdictions have effectively implemented the GloBE Rules and administrative guidance without any modification. Whereas others have attempted to clarify, simplify or otherwise improve areas of the GloBE Rules and Administrative Guidance (AG).

Hong Kong will likely adopt a hybrid approach. In general, it will seek to directly apply the GloBE Rules which should be read in a manner that secures consistency with the AG as published immediately before the enactment of the GloBE Rules and HKMTT. For certain provisions, a drafting approach will be adopted that may depart from those used in the GloBE Rules. This will be done to clarify the intended meaning of the GloBE Rules and AG and will only be done to the extent it does not jeopardize Hong Kong’s ability to be treated as having implemented a QDMTT.

It is not entirely clear how future iterations of the AG will be incorporated. We foresee that it may be necessary to make direct changes to the GloBE Rules and HKMTT in certain instances. In others, it may be possible to merely update the consistency references to the latest version of the AG.

What are the key aspects of the HKMTT?

In general the HKMTT will follow the requirements of a QDMTT per the AG. With regard to areas where variation is permitted:

Local accounting standard – Hong Kong proposes to take advantage of the option to allow MNE Groups to file under local GAAP.

Substance based income inclusion (SBIE) – Hong Kong proposes adopt the SBIE in line with the GloBE Rules and will not provide a less generous form of the SBIE than per the GloBE Rules.

Minimum tax rate – Hong Kong proposes to reference the 15% minimum tax rate rather than adopting a higher rate.

Joint ventures – Hong Kong proposes to collect top-up tax from joint ventures directly, rather than collecting top-up tax from constituent entities (CEs) that may own join ventures. The rationale for this is to provide certainty in meeting the QDMTT Safe Harbour and to not utilize the switch off rule in this regard.

Switch-off rule in general - The document has requested further input on the use of the “switch-off rule”. Under the switch-off rule Hong Kong could take steps which potentially make it more attractive to certain sectors. For example, it could opt not to charge HKMTT directly on investment entities. This would effectively mean that Hong Kong would not benefit from the Safe Harbour in respect of these entities and would therefore be taking advantage of the “switch-off rule”. However, Hong Kong could be a more attractive asset management hub as a result as tax neutral investors in funds would be less likely to inadvertently suffer top-up tax in the event of for example, an accidental consolidation. The document has requested general input on the switch-off rule.

How will Hong Kong adjust its location rules given that it does not tax based on residency

The consultation acknowledges that determining the location of CEs is important under the GloBE Rules and that the GloBE Rules refer to residency for this. As Hong Kong does not tax based on residency or have a generally applicable definition of residency this could be problematic for Hong Kong residents and permanent establishments.

Therefore, it is proposed that Hong Kong will introduce a general definition under the GloBE Rules and HKMTT which will reference the place of incorporation / formation, or the place of normal management and control. It is unclear precisely how these terms will be incorporated in the legislation. However, it is welcome that the FSTB and IRD acknowledge this issue. Interestingly, the document proposes making these provisions retrospective in their application. The document seeks feedback on both the locational provisions and the retrospective nature of those provisions.

What approach will Hong Kong take to the UTPR

Under the UTPR there are two possible approaches. The first is to limit the deductions available to CEs in order to collect additional tax as a result of higher taxable profits, the other is to charge an additional tax equivalent to the amount that may be collected under the UTPR. The former approach predominantly derives from the original version of the UTPR which used to have a much greater emphasis on payments. Whereas the latter approach is not payment dependant but permits tax to be collected irrespective of the tax position of the paying entity.

Hong Kong has proposed to adopt the latter approach. This could be seen as less beneficial to taxpayers, although given the proliferation of QDMTTs under which it is anticipated most top-up tax will be collected, the UTPR rules will only be relevant in a narrow set of circumstances.

UTPR exclusion to initial stage of international activity replicated in HKMTT

Where an MNE Group operates in no more than 6 jurisdictions with total tangible assets of no more than €50 million across all jurisdictions excluding the jurisdiction in which it has most assets, it is proposed that the HKMTT will not apply, unless the relevant low tax profits would otherwise be subject to an IIR, such that Hong Kong would effectively be ceding taxing rights through the provision of this relief.

How will Hong Kong approach the allocation and recharging of top-up tax?

MNE Groups will be permitted to allocate top-up tax to one or more Hong Kong CEs.

With regard to the recharging of top-up tax, it is proposed that Hong Kong will not provide a deduction for expenses in respect of the recharging of top-up tax, nor will it tax such amounts received. This is generally helpful and provided this rule applies in respect of payments received from other jurisdictions, should provide flexibility in helping MNE Groups to align the economic burden of top-up tax with the entities that effectively give rise to that tax.

How about filing?

The CEs in Hong Kong will each have a top-up tax return filing obligation, which will be a single return for both the GloBE Rules and HKMTT. Groups may specify one entity to make a single filing on behalf of all entities in order to discharge their obligation. However, the filing of a notification would still be required, notwithstanding the return is filed by another entity. Where the MNE Group is Hong Kong headquartered or where Hong Kong does not have an information exchange agreement in place that would allow it to obtain all relevant top-up tax return information, a local filing would need to include all relevant top-up tax return information. It is not entirely clear how these requirements would be relaxed where an information exchange agreement exists under which Hong Kong would receive the relevant top-up tax return information.

In accordance with the broader move towards E-filing and to facilitate the exchange of information with other jurisdictions, E-filing will be mandatory.

Will the Subject to Tax Rule be included in this consultation?

The document outlines that the Subject to Tax Rule will not be a part of this consultation. It is likely that any consultation on the Subject to Tax Rule will be delayed until such time as the preferences of jurisdictions that may wish to implement the rule into their treaties with Hong Kong becomes clear.

Consultation period

The consultation runs for a period of three months and will close on 20 March 2024. It will be important for taxpayers to participate actively in this consultation, in particular in respect of areas that the FSTB and IRD could clarify as the new law is drafted.

If you have any questions, please contact our professionals:

Author

Jonathan Culver
Tax Partner
+852 2852 6683
joculver@deloitte.com.hk

International Tax and M&A Services

National Leader

Vicky Wang
Tax Partner
+86 21 6141 1035
vicwang@deloitte.com.cn

Northern China
Nina Zhou
Tax Partner
+86 10 8512 5477
nzhou@deloitte.com.cn

Eastern China
Hong Ye
Partner
+86 21 6141 1171
hoye@deloitte.com.cn

Western China
Tony Zhang
Tax Partner
+86 28 6789 8008
tonzhang@deloitte.com.cn

Southern China
Anthony Lau
Tax Partner
+852 2852 1082
antlau@deloitte.com.hk

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