Inclusive Framework BEPS Agreement

On 8 October 2021, the OECD/G20 Inclusive Framework (IF) on Base Erosion and Profit Shifting released an 8-page statement which refines the statement of 1 July 2021. In terms of consensus, 136 of the 140 IF member jurisdictions have agreed to this release. The four jurisdictions that have not signed up are Kenya, Nigeria, Pakistan and Sri Lanka. 

Consistent with the statement of 1 July 2021, both Pillars 1 and 2 are covered. Pillar 1 deals with the reallocation of certain profits from very large mutlinational enterprises (MNEs) to market jurisdictions.  Pillar 2 deals with a Global Minimum Tax.  The statement annex includes a detailed implementation plan with timelines for the development of detailed rules, for legislative implementation, and target effective dates.

Based on the OECD’s proposed timeline, Amount A under Pillar 1 and the Income Inclusion Rule (IIR) and Subject to Tax Rule under Pillar 2 will become effective from 2023 the earliest. Implementation of Pillars 1 and 2 in Hong Kong will require legislative action, including ratification of the Amount A Mulilateral Convention (after it has been signed by the Mainland China and extended to Hong Kong) as domestic legislation and enactment of domestic rules to introduce the IIR. Separate domestic legislation will also be required if Hong Kong is going to introduce a domestic minimum tax (DMT) regime in response to the adoption of the Pillar 2 rules by other jurisdictions.  In addition, in determining the precise changes to be made to the Hong Kong tax system in response to the European Union’s review of Hong Kong’s offshore regime and inclusion of Hong Kong on its grey list for tax purposes, the potential impact of the Pillar 2 rules and a DMT regime will need to be taken into consideration.

Given the significant changes to be brought about to the Hong Kong tax system and the complexity of the legislative changes involved, it is important for the Hong Kong Government to start consultation with the stakeholders in the early stage of the legislative process and allow sufficient time for the stakeholders to provide their inputs and recommendations to the government.

The agreed framework for international reforms will have a wide-ranging effect on many MNEs. Given the ambitious timeline for implementation, it is important that potentially impacted businesses understand what is coming and prepare for the resulting changes.