The impact of BEPS on tax incentives in Asia Pacific

As of 4 November 2021, 137 out of 141 member jurisdictions of the G20/OECD Inclusive Framework on BEPS (“IF”) have agreed to the statement issued by the IF on 8 October 2021, which sets out the building blocks and key rates for Pillar One and Pillar Two of the BEPS 2.0 reform.  

Many jurisdictions across the ASPAC region, including the Hong Kong SAR, offer a range of tax incentives to attract business and investment.  However, the introduction of a global minimum tax of 15% under Pillar Two raises questions as to the appeal and future of such tax incentives.  The global minimum tax may reduce the effectiveness of tax incentives and disincentivize jurisdictions to introduce tax concessions if another jurisdiction can claw back that benefit.  

Hong Kong SAR offers a wide range of income exclusions / exemptions, tax incentives and enhanced deductions which could reduce a group’s overall effective tax rate in Hong Kong SAR below the agreed 15% global minimum tax rate under BEPS Pillar Two.  Changes to the Hong Kong tax system will also be required as a result of the inclusion of the Hong Kong SAR in the European Union’s grey list for tax purposes.  Affected businesses will need to start assessing and modelling the impact of the upcoming changes and consider whether any business restructing will be required.