Hong Kong delays implementation of OECD Pillar Two rules including the IIR to 2024 at the earliest

The Global Anti-Base Erosion rules (GloBE rules) under Pillar Two of the OECD BEPS 2.0 project seek to introduce a global minimum effective tax of 15% through the Income Inclusion Rule (IIR) and the Undertaxed Payment Rule (UTPR)1. 

The Secretary for Financial Services and the Treasury (the SFST) has confirmed in a recent letter to stakeholders including business chambers and multinational enterprises (MNEs) that, in line with the delay of the implementation of the GloBE rules in other jurisdictions such as the European Union and the United Kingdom, Hong Kong will also delay the implementation of the IIR from the original OECD timeline of 2023 to 2024 at the earliest.

As for the implementation of the UTPR and by extension the domestic minimum top-up tax (DMT), no specific timeline has been provided. The SFST only indicated that he will continue to monitor the implementation targets of other jurisdictions as regards those measures.

Previously, the Financial Secretary announced in the 2022-23 Budget that, in addition to adhering to the OECD original timeline for the implementation of the GloBE rules, the Government was also considering the introduction of a domestic minimum top-up tax (DMT) starting from the year of assessment 2024-25. The envisaged DMT would bring the effective tax rate of in-scope MNEs up to the global minimum effective tax rate of 15% in order to safeguard Hong Kong's taxing rights over economic activities conducted by entities in Hong Kong.

The SFST indicated that he had already conducted a series of consultation sessions with the stakeholders on the implementation of the GloBE rules in Hong Kong. One of the points raised most consistently and overwhelmingly by the stakeholders was the need for a sufficient lead-in time before the GloBE rules were implemented in Hong Kong. The stakeholders pointed out that early implementation of the GloBE rules in Hong Kong ahead of other jurisdictions would put Hong Kong’s MNEs at a disadvantaged position.   

The SFST also indicated that the Government intends to launch a consultation exercise towards the end of 2022 such that the consultation exercise can benefit from the Implementation Framework for the GloBE rules, which is scheduled to be released by the OECD later this year. The consultation exercise will then gauge the views of stakeholders on how best to translate the GloBE rules into the domestic legislation and relevant requirements for the purposes of implementing the GloBE rules in Hong Kong. 

We welcome the Government’s decision to defer the implementation of the GloBE rules in Hong Kong. In the absence of a critical mass of jurisdictions implementing the GloBE rules, early implementation of these rules would put Hong Kong’s businesses at a competitive and administrative disadvantage and risk causing a relocation of economic activities away from Hong Kong.

Furthermore, the deferral would also give more time to in-scope MNEs to get prepared in terms of process and system upgrade for the collation of relevant data for the complex tax reporting and compliance requirements under the GloBE rules. 

Clients who need assistance in this regard should contact their tax executives.  

¹In October 2021, the Organisation for Economic Cooperation and Development (OECD) and G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) agreed a two-pillar approach to address the challenges arising in relation to the taxation of the digital economy.  Pillar One focuses on the allocation of taxing rights and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules; Pillar Two seeks to establish a co-ordinated system of taxation intended to ensure in-scope MNEs (with a consolidated turnover of at least €750 million) pay the minimum level of tax on income arising in each of the jurisdictions in which they operate. The rules create a “top-up tax” to be applied on profits in any jurisdiction whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum 15% rate.