Will the introduction of the Global Minimum Tax and the inclusion of Hong Kong in the “watch list” of European Union’s non-cooperative tax jurisdictions affect you?

Will the introduction of the Global Minimum Tax and the inclusion of Hong Kong in the “watch list” of European Union’s non-cooperative tax jurisdictions affect you?

Loren Chan

With rapid changes in the international tax landscape in recent years, Hong Kong has been proactively making changes to embrace the new rules.  The Hong Kong Government has announced that it would actively implement the tax practice according to international consensus while maintaining Hong Kong’s competitive edge in the business environment.

The Global Minimum Tax
On 8 October 2021, the Organisation for Economic Cooperation and Development (“OECD”) released a statement stating that multinational enterprises (“MNEs”) meeting certain conditions will be subject to a minimum tax of 15% from 2023.  It aims to ensure large MNEs pay a minimum level of tax regardless of where they are headquartered or where they operate their business.  The rules are set to provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights, or the payment is otherwise subject to low effective taxes. 

The global minimum tax of 15% is a result of negotiation and compromise among members of the OECD/Group of 20 countries (“G20”) Inclusive Framework on base erosion and profit shifting. Among the 140 members, 136 jurisdictions including Hong Kong have agreed to implement the new rules. 

Who would be affected by the Global Minimum Tax?
The global minimum tax only applies to MNEs that meet or exceed an annual gross revenue of EUR750 million.

In other words, if you are not an MNE or if you are an MNE and your annual gross revenue does not meet the EUR750 million threshold, you would not be subject to the global minimum tax.

Exclusions are provided for government entities, international organisations, non-profit organisations, eligible pension funds and investment funds, as well as international shipping income.

With the implementation of the global minimum tax in 2023, MNEs should immediately review if their annual gross revenue would meet or exceed the threshold of EUR750 million.  If they reach the threshold, MNEs should assess the impact under the new rules and seek ways to minimise the potential burden.

The European Union List of Non-Cooperative Jurisdictions for Tax Purposes
Apart from changes initiated by OECD/G20, it is worth noting that on 5 October 2021, the European Union (“EU”) Council announced a revised EU list of non-cooperative jurisdictions for tax purposes.  Hong Kong, together with Costa Rica, Malaysia, North Macedonia, Qatar and Uruguay were newly added to Annex II (the “watch list”) after EU Council’s assessment on a number of foreign source income exemption regimes.  The EU Council considers the current territorial tax regime in Hong Kong may facilitate tax avoidance and lead to situations of double non-taxation.

As background information, the EU has established a list of non-cooperative jurisdictions for tax purposes in December 2017 to promote good tax governance worldwide.  Jurisdictions are assessed based on criteria (such as tax transparency, fair taxation, prevention of tax base erosion and profit shifting) set by the EU Council. 

Would this affect the territorial tax regime adopted by Hong Kong for years?
In response to the EU’s announcement, the Hong Kong Government has committed to the EU to amend the Inland Revenue Ordinance by the end of 2022 and implement relevant measures in 2023.  According to the Government’s press release on 5 October 2021, the proposed legislative amendments will merely target corporations, particularly those with no substantial economic activity in Hong Kong, that make use of passive income such as royalty and interest to evade tax across borders.  Individual taxpayers will unlikely be affected.

Hong Kong has adopted the territorial source principle of taxation for many years. Such territorial tax regime has historically attracted many corporations to make Hong Kong as its Asia business hub.  In this regard, the Government has stressed that Hong Kong will continue to maintain this territorial principle and uphold this simple, certain and low-tax regime with a view to maintaining its competitiveness in the business environment. The Government also reiterated that Hong Kong enterprises will not be subject to defensive tax measures imposed by the EU as a result of being included in the watch list on tax co-operation.

While facilitating the EU to swiftly remove Hong Kong from the watch list, the Government indicated that it will strive to minimise the compliance burden of corporates. 

Would companies who lodge offshore claims be affected?
In view of the above, it is quite certain that there will be changes in tax laws in 2022.  We foresee this upcoming change would largely affect taxpayers that generate passive income and without active activities in Hong Kong.  To play safe, taxpayers currently enjoying offshore claims with no / minimal substance in Hong Kong should also closely monitor on the latest developments from the Hong Kong Government and seek appropriate tax advice in advance in order to mitigate challenges from overseas tax jurisdictions as well as the Hong Kong Inland Revenue Department.