Hong Kong: Update on implementation of Pillar Two global minimum tax

The Deputy Commissioner of Inland Revenue recently provided an update on implementation of the Pillar Two global minimum tax in Hong Kong.

• The public consultation paper on implementing the global anti-base erosion (GloBE) rules and a domestic minimum top-up tax (DMTT) in Hong Kong (HKMTT) is expected to be released in December 2023. 
• The GloBE rules (i.e., income inclusion rule (IIR) and undertaxed profits rule (UTPR)) and HKMTT are expected to become effective in 2025 (e.g., apply to accounting periods commencing on or after 1 January 2025). 
• It is proposed that the GloBE rules will be incorporated into the Inland Revenue Ordinance (IRO) as far as practicable with some necessary adaptations for Hong Kong.
• Implementation approach:
  • Apply the GloBE rules by closely following the OECD’s GloBE model rules, commentary, and administrative guidance
  • Top-up taxes under the GloBE rules and HKMTT treated as profits tax
• It is anticipated that a definition of “Hong Kong resident entity” will be added to the IRO for purposes of the GloBE rules and HKMTT and apply retrospectively from 1 January 2024 (given some jurisdictions will implement IIR starting from 2024). An entity incorporated / constituted in Hong Kong or an entity incorporated / constituted outside Hong Kong but normally managed or controlled in Hong Kong would be regarded as a Hong Kong resident entity. 
• Core design of HKMTT:
  • Make HKMTT (1) a qualified DMTT (QDMTT) and ensure it (22) qualifies for the QDMTT safe harbor
  • Apply HKMTT to both Hong Kong and foreign-headquartered groups applying the annual consolidated revenue threshold as under the GloBE rules (i.e., €750 million or more)
  • Impose HKMTT on 100% of the total top-up tax computed for all the Hong Kong constituent entities (CEs), irrespective of whether they are wholly owned or partially owned 
  • Allocate the top-up tax under HKMTT based on the ratio of the GloBE income of a particular Hong Kong CE to the total GloBE income of all Hong Kong CEs (alternatively, the multinational enterprise (MNE) group could designate one or more Hong Kong CEs as the paying entities but in such case, all Hong Kong CEs would be jointly and severally liable for the whole amount of the top-up tax payable)
  • Propose to allow the use the local financial accounting standard for HKMTT computation
  • Propose to provide the country-by-country (CbC) reporting safe harbor and QDMTT safe harbor in the domestic legislation
• Filing obligations and compliance under the GloBE rules and HKMTT:
  • In addition to filing a top-up tax return, require filing of an annual notification on top-up tax filing obligation
  • In-scope MNE groups (Hong Kong or foreign headquartered) allowed to designate one Hong Kong CE to file the top-up tax return / notification
  • In-scope MNE groups file a single top-up tax return for the purposes of the GloBE rules and HKMTT
  • Filing deadlines for (1) the top-up tax notification of no later than six months after the end of the fiscal year and (2) the top-up tax return of no later than 15 months after the end of the fiscal year (extended to 18 months in the first / transitional year)
  • Adopt same “assessment first audit later” approach for top-up tax 
  • No provisional top-up tax charged
  • Apply current administrative provisions in the IRO (e.g., anti-avoidance rules, objection procedures, record keeping, collection and recovery of tax, penalties)

For more information, contact the Global Leader of KPMG Global Transfer Pricing Services:

Burcin Nee | bnee@kpmg.com