What to expect from an e-Series on Base Erosion and Profit Shifting 2.0
On 12 October 2020, the G20/Organization for Economic Cooperation and Development Inclusive Framework on Base Erosion and Profit Shifting (BEPS) released two detailed “blueprints” in relation to its ongoing work to address the tax challenges arising from the digitalization of the economy. New tax rules have been proposed in respect of two key aspects:
Pillar 1: Amending the rules for allocating taxing rights over the profits from multinational consumer-facing businesses and automated digital services, giving greater taxing rights to market jurisdictions. In addition, the blueprint introduces a three-part profit allocation mechanism that partially departs from the arm’s length principle, while also creating a new taxing right that is not based on physical presence but on having a significant economic presence in a jurisdiction.
Pillar 2: The blueprint proposes giving parent and source jurisdictions a right to tax untaxed/undertaxed income where an entity’s income is taxed at an effective rate below a certain minimum rate, known as the Global Anti-Base Erosion (GloBE) rules. The rules seek to ensure that multinational enterprises (MNEs) pay a minimum level of tax on a global basis and dissuade them form shifting profits to low tax jurisdictions by allowing for the ultimate parent entity jurisdiction to collect “top-up tax” if income in another jurisdiction is not taxed at an effective tax rate equal to or higher than a certain agreed minimum rate.
While the minimum rate has yet to be determined, it is expected to be at least 10 percent, which could have a significant impact on the attractiveness of Hong Kong’s territorial tax regime, various existing concessionary tax regimes and the capital gains exemption.
About the series
The Hong Kong Institute of CPAs’ Taxation Faculty held three e-seminars on the blueprints and what impact the BEPS 2.0 initiatives may bring to Hong Kong. The seminars are available as e-learning on the Institute’s website.
Pillar 1 Blueprint: Peter Brewin, Transfer Pricing Partner, PwC Hong Kong with 18 years’ experience, discusses the key elements in the Pillar 1 Blueprint. He provides context on the factors driving the introduction of the new taxing rights, summarizes the groups and types of business in the scope of the new taxing right, discusses the building blocks and how taxing rights are expected to be calculated, before offering suggestions on actions that in-scope groups make wish to take to be prepared for the changes.
Pillar 2 Blueprint: Jonathan Culver, International Tax Partner, Deloitte, with significant regional experience, covers the key elements in the Pillar 2 Blueprint and important points of reference. These include the interlocking rules and order of application of these rules, treaty compatibility and dispute prevention; carve-outs and exclusions; interaction between the GloBE rules and the United States global intangible low-taxed income (GILTI) rules; and the implications to MNE groups headquartered in Hong Kong and foreign MNE groups that have investments in Hong Kong.
Roundtable on BEPS 2.0 Blueprints – What do they mean for Hong Kong?: The panellists, all members of the Taxation Faculty, discuss what the blueprints mean for Hong Kong, how the source rule under Pillar 1 interacts with the source rules for profits tax, the rationale for carving out certain industries, the question of introducing a domestic minimum tax rate; the interaction between GloBE and the U.S. GILTI rules, and how MNEs should prepare for BEPS 2.0.
The moderator of the discussion was Jo-An Yee, Tax Partner, EY, specializing in technology and telecommunication has over 20 years of practical experience in providing tax advisory and compliance services clients. The panellists were: Patrick Cheung, Transfer Pricing Partner, KPMG, with more than 25 years of international tax experience including over 20 years as a transfer pricing specialist; Cecilia Lee, Transfer Pricing Partner, PwC, a specialist with over 25 years of transfer pricing and cross-border taxation experience; Deloitte’s Jonathan Culver; and Eric Chiang, Deputy Director, Advocacy and Practice Development of the Institute, who is responsible for managing the Taxation Faculty, and reviewing proposed tax legislations in Hong Kong and preparing submissions on legislation.
The Hong Kong Institute of CPAs’ Taxation Faculty brings together the tax activities and programmes run by the Institute: primarily the technical, advocacy and liaison work as well as member services such as seminars, networking events, and an e-newsletter. The Taxation Faculty helps raise the profile of the taxation profession in Hong Kong and provides a stronger voice for members working in this field. It also offers a platform for the further development of high-quality tax services under the Institute. The faculty also lends support to other Institute initiatives, such as the advanced diploma in specialist taxation. Members and non-members are welcome to join the Taxation Faculty. More information can be found on the Institute’s website.