Proposals on measures to counter base erosion and profit shifting by the Hong Kong Government

On 31 July 2017, the Hong Kong Government released a consultation report which is about Measures to Counter Base Erosion and Profit Shifting.

According to the report, in June 2016, Hong Kong, as a member of the Organisation for Economic Co-operation and Development (“OECD”), announced that it will implement the base erosion and profit shifting (“BEPS”).

To facilitate the implementation and legislation the BEPS, from October to December 2016, the Financial Services and the Treasury Bureau conducted a consultation on the Government’s proposals.

Here are the major proposals:

• To assimilate the international transfer pricing standards to our Inland Revenue Ordinance;
• To restrict entities in Hong Kong to transact with their related parties in arm’s length under the elaborated rules and requirements
• To authorise the Commissioner of Inland Revenue (“the Commissioner”) to adjust the profits or losses of an enterprise by the differences (tax advantage) between the actual transaction processed by two related parties and same transactions processed by independent parties
• To maintain records or documents for transfer-pricing transactions in a Three-tier Standardised Approach (master  file,  local  file  and  country-by–country (“CbC”) report);
• To adopt Principal Purposes Test (“PPT”) rule as Multilateral Instrument (“MLI”);
• To put in place a full-fledged statutory dispute resolution mechanism; and
• To conduct spontaneous exchange of information on six categories of tax rulings with the relevant jurisdictions.

For details of the proposals and the comments from 23 organisations and 3 individuals, please refer to Consultation Report on Measures to Counter Base Erosion and Profit Shifting.