Consultation on implementation of global minimum tax and minimum top-up tax in Hong Kong

The Hong Kong government or better the Financial Services and the Treasury Bureau and the Inland Revenue Department have launched a joint consultation regarding the adoption of the global minimum tax framework proposed by the OECD, known as BEPS 2.0. The framework aims to address the challenges posed by the digital economy as regards the taxation of income generated across national borders and ensure that large multinational enterprise groups maintain a minimum 15% tax rate across all jurisdictions in which they operate. Hong Kong intends to implement this global minimum tax from 2025 specifically targeting substantial multinational entities (MNEs) while exempting smaller businesses from its scope.
The BEPS 2.0 framework consists of two pillars: Pillar One targets the allocation of taxing rights over automated digital services and consumer-facing businesses and Pillar Two focuses on implementing the beforementioned global minimum tax and a domestic minimum top-up tax. This consultation paper now explains the concepts and principles of the global minimum tax under Pillar Two and – to assert control over taxation and uphold international tax commitments – seeks feedback on the introduction of the Hong Kong Minimum Top-Up Tax (HKMTT) which will guarantee that relevant entities meet the 15% tax threshold. The document thereby requests input on details on the design and implementation of the HKMTT, thereby focusing on simplicity and reducing administrative burdens for businesses.
In detail, the document
– describes the entire design of the new BEPS 2.0 taxation framework in Hong Kong, ranging from the scope of affected MNEs (annual consolidated revenues of or above EUR 750 million), to specific exclusions, e.g. for pension and investment funds, to the accounting standards to be used for determining taxation obligations;
– describes the approach the government plans to take to determine the HKMTT in accordance with the Undertaxed Payments Rule (UTPR) which is designed to address the potential base erosion through cross-border payments. Under the UTPR, the payor may be required to add a top-up tax to the payment, if the recipient (located in another country) is subject to a low effective tax rate;
– outlines the methods that should be applied to determine the income of subsidiaries in low-tax countries for purposes of applying the HKMTT; and
– describes the methodology to determine the Minimum Top-UP Tax for such entities.
The document also outlines and seeks feedback on corresponding reporting obligations of firms and the information that will be requested from firms in this context.
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It may be worth noting that the two regulators seek to apply the new HKMTT retroactively to January 1, 2024, once enacted.