Hong Kong starts legislative process to give effect to Multilateral Instrument

The Multilateral Instrument (MLI) seeks to facilitate the implementation of tax-treaty-related measures to counter base erosion and profit shifting (BEPS). 

Hong Kong has designated 39 of its existing comprehensive avoidance of double taxation agreements (CDTAs) as covered tax agreements (CTAs) to be amended through the MLI. The remaining six signed CDTAs are not listed because they have already incorporated BEPS-compliant provisions.

To avoid any unintended impact on taxpayers, Hong Kong adopts a minimalist approach and save for one minor option, only implements the mandatory provisions of the MLI, all other optional provisions being left to future bilateral discussions with the parties concerned where necessary. That means Hong Kong has opted out all the remaining substantive optional articles of the MLI. 

The mandatory provisions of the MLI that, where necessary, will be incorporated into the CTAs that Hong Kong has designated in the MLI are: (i) preventing treaty abuse by way of adopting certain general anti-abuse rules, including incorporating a “principal purpose test” (PPT) clause or a combination of the PPT and a “limitation of benefit” (LOB) clause in a CDTA. In this regard, Hong Kong only adopts the PPT in the MLI; (ii) incorporating a preamble statement to set out the purpose of a CDTA is intended to eliminate double taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements, without creating opportunities for non-taxation, the minor addition option under this provision being stating the desire of the contracting parties “to further develop their economic relationship and to enhance their co-operation in tax matters”. In this regard, Hong Kong adopts the additional option under this provision; and (iii) amending the “mutual agreement procedure” (MAP) clause of a CDTA to facilitate more effective resolution of disputes.

The provisions of the MLI will have effect in Hong Kong with respect to a CTA on 1 April 2023 (for taxes withheld at source), or on 1 April 2024 (for other taxes), at the earliest, the exact dates of which are subject to the completion of the legislative and other relevant procedures of the MLI by Hong Kong's CDTA partners.

Taxpayers should review the potential changes to be introduced by the MLI and evaluate whether new business models should be adopted in light of the tighter anti-avoidance measures. Professional tax advice should be sought where necessary.