BEPS 2.0 and Hong Kong: How International Tax Reform Impacts MNEs
- Jan-Patrik Reimann
- May 26, 2022
- 4 min read
Updated: 3 hours ago
Author: Stefan Schmierer, Managing Partner | Co-author: Jan-Patrik Reimann, Head of Finance & Compliance
Introduction to BEPS 2.0 in Hong Kong
How Tax Reform BEPS 2.0 Impacts International MNEs in Hong Kong
In a historical agreement signed on 1 July 2021, 130 nations endorsed a declaration outlining a framework for reforming international tax regulations. Hong Kong, as an international financial and commercial centre, announced to implement BEPS 2.0 (Base Erosion and Profit Shifting), which consists of two pillars. BEPS 2.0 primarily targets major MNEs (multinational enterprises) that fulfil the defined standards but will have no impact on Hong Kong's small and medium-sized firms.
The Two Pillars of BEPS 2.0
The agreement's first pillar is a substantial shift from the conventional international tax regulations of the previous 100 years, which primarily required a physical presence in a country before that country had the right to demand tax.
The second pillar achieves an unprecedented agreement on a worldwide minimum level of taxes, thereby establishing a floor for tax competitiveness among states.
BEPS 2.0 Implementation Timeline
BEPS 2.0 (Base Erosion and Profit Shifting) Implementation Expected in 2023
The OECD (Organisation for Economic Cooperation and Development) intends to finish writing the BEPS 2.0 model regulations by the end of 2022 or 2023, allowing participating jurisdictions to carry out their domestic legislative exercises and implement the package in 2023.
"The agreement's first pillar is a substantial shift from the conventional international tax regulations of the previous 100 years, which primarily required a physical presence in a country before a country had the right to demand tax."
Pillar One: Revenue Threshold and Scope
Applicable to MNEs with €20bn or More in Worldwide Revenue
Pillar One effectively ties taxation rights with local market involvement. It will apply to companies with more than €20 billion (HKD 174 billion) in worldwide revenue and a profit before tax margin of at least 10%, calculated using an averaging process.
The revenue threshold will be reduced to €10 billion (HKD 87 billion) after seven years, assuming effective implementation.
Four Key Points to Note
The reforms have a global reach and, although simplified compared to prior proposals, remain technically challenging.
Digital Services Taxes and other relevant measures are to be repealed, although the identification and timeline remain unclear.
The scope of in-scope enterprises has shifted away from only highly digitalised business models. Extractives and regulated financial services are excluded, but most other businesses may be included.
The guidelines are expected to be finalised in 2022 and to come into force in 2023.
Pillar Two: Worldwide Minimum Tax Framework
Pillar Two Develops a Global Minimum Tax
Through a set of interlocking principles, Pillar Two develops a worldwide minimum taxation framework. The Model Rules apply to MNE groups with total consolidated group revenue of more than €750 million in at least two of the previous four years.
A revised statement issued on 8 October 2021 outlined key elements of the two-pillar approach. To advance this work, the Model Global Anti-Base Erosion (GloBE) Rules under Pillar Two were released on 20 December 2021.
New Rules Introduced Under Pillar Two
Pillar Two introduces three new rules providing tax authorities with additional taxing rights:
1) Income Inclusion Rule (IIR)
An IIR imposes a top-up tax on a parent entity where income is taxed at less than 15% in subsidiaries or permanent establishments.
2) Undertaxed Payment Rule (UTPR)
The UTPR denies deductions or requires equivalent adjustments where low-taxed income has not been fully captured under an IIR.
3) Subject to Tax Rule (STTR)
The STTR overrides treaty benefits for certain related-party payments, including interest and royalties, where the payment is subject to tax below 9% in the recipient jurisdiction. The STTR applies first and is creditable under the IIR and UTPR.
"The Pillar Two rules are expected to be enacted in 2022 and to go into force in 2023."
Implementation Outlook for Pillar Two
In October 2021, a thorough implementation plan was issued. Model legislation for the GloBE rules were included and a multilateral convention announced. A STTR model provision, as well as an implementing international agreement and potential transitional provisions, will be included in the proposal (possibly a deferral of the UTPR). This means that, while there are still uncertainties, Pillar Two is likely to result in a significant shift in the tax environment.
How Ravenscroft & Schmierer Can Assist?
The implementation of BEPS 2.0 in Hong Kong introduces complex compliance and structuring considerations for international groups. Ravenscroft & Schmierer advises multinational enterprises on Pillar One exposure, Pillar Two minimum tax implications and cross-border tax planning strategies.
Contact our team to assess how BEPS 2.0 may impact your organisation.
FAQ: BEPS 2.0 Hong Kong
What is BEPS 2.0?
BEPS 2.0 is a global tax reform initiative introducing two pillars to reallocate taxing rights and establish minimum taxation.
Does BEPS 2.0 affect all companies in Hong Kong?
No. BEPS 2.0 primarily targets large multinational enterprises and does not affect small and medium-sized firms.
What is Pillar One?
Pillar One reallocates taxing rights based on market presence rather than physical establishment.
What is Pillar Two?
Pillar Two introduces a worldwide minimum tax framework applying to MNE groups with revenue above €750 million.
When will BEPS 2.0 be implemented?
The reforms are expected to be implemented starting in 2023.
Are Hong Kong financial institutions affected?
Extractives and regulated financial services are excluded from Pillar One.
DISCLAIMER: Whilst every effort has been made to ensure the accuracy of this article, it is general in nature and does not constitute legal advice of any kind. You should seek your own personal legal advice before taking legal action. We accept no liability whatsoever for loss arising out of the use or misuse of this article.
For specific advice, please contact:
Managing Partner
+852 2388 3899
Jan-Patrik Reimann
Head of Finance & Compliance
+852 2388 3899
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