How will BEPS 2.0 impact mainland China and Hong Kong?
As mentioned in our previous article, the «Multilateral Convention on the Implementation of the Relevant Tax Treaties on the Prevention of Base Erosion and Profit Shifting (BEPS)» entered into force on 1 September 2022. It aims to revise existing bilateral tax treaties as a package. The OECD (Organization for Economic Cooperation and Development) has issued the final implementation guidance for pillar two of the BEPS 2.0 initiative, and following continued discussions and disagreements over the details of the rules, the implementation of a global minimum tax rate of 15 percent has been delayed until 2024.
On 1 February 2023, OECD released the «Agreed Administrative Guidance for the Pillar Two GloBE[1]Rules» (hereinafter “Guidance”). These are a set of administrative guidelines for members of the “OECD/G20 Inclusive Framework on BEPS” to implement the GloBE Rules, which make large multinational enterprises (hereinafter “MNEs”) liable for a minimum corporate income tax (hereinafter “CIT”) rate of 15 percent on the income arising in each of the jurisdictions in which they operate. This initiative is commonly referred to as BEPS 2.0.
Both mainland China and Hong Kong have agreed to the minimum tax rate and associated rules, and have agreed to the “Two Pillar Solution” and GloBE Rules, committing to reforming the international tax framework and tackling tax evasion by MNEs. This includes making changes to domestic tax regulations in order to meet the minimum 15 percent CIT rate, hence, this means some multinationals in China may be required to pay top-up taxes in the future. Our article will discuss the potential impact of the China BEPS 2.0 framework on multinationals.
The “Two Pillar Solution” is: –
- Pillar One – focused on profit allocation and nexus, requiring MNEs to pay taxes in the countries where they have users, even if they have no commercial presence there.
- Pillar Two – focused on a global minimum tax rate of 15 percent targeting large MNEs with global turnover above €750 million.
The GloBE Rules only apply to MNEs with a global turnover of at least €750 million. It does not apply to companies that have no foreign presence, government entities, international and non-profit organizations, or entities that meet the definition of a pension, investment, or real estate fund.
For mainland China, this may only require minor adjustments. Mainland China’s standard CIT rate is 25 percent, however, certain industries in certain jurisdictions are eligible for a lower CIT rate of 15 percent. Although this still meets the BEPS 2.0 threshold, various additional tax incentives may put a company’s CIT rate below 15 percent. These jurisdictions will therefore have to ensure that the MNEs that do not meet the threshold for BEPS 2.0 pay top-up taxes to ensure they hit the 15 percent minimum.
For Hong Kong, the situation is similar, although the scope of companies that will be affected will be broader. Effective from 1 April 2018, there’s a two-tiered profit tax rate regime in Hong Kong. The profits tax rate for the first USD 2 million of assessable profits is at a rate of 8.25%, while the one above USD 2 million is subject to a rate of 16.5%. This is Hong Kong’s standard CIT rate, in which the second tier is above the BEPS 2.0 threshold, but the rest, with the various tax incentives available, many companies pay CIT rates of below 15 percent. This could be the one to be focused on, and probably will be required to pay top-up taxes. However, same as in mainland China, the specific practical standards of localization need further attention.
Although the Guidance is the final piece of implementation guidance for IF members, the OECD acknowledges they will continue to work in the coming year before implementation. This will include ensuring the coordinated implementation of the rules over the year, as well as soliciting further feedback from stakeholders in order to further refine the rules and achieve “better tax certainty”.
In the statement[2] released along with the Guidance, the OECD said that the guidance will be incorporated into an updated commentary (interpretation guidelines to the GloBE Rules) later in 2023, replacing the original version released in March 2022. In addition, the IF will “continue to release further Agreed Administrative Guidance on an ongoing basis, to ensure that the GloBE Rules continue to be implemented and applied in a coordinated manner”.
Should you have further questions, please feel free to contact us.
Reference:
International tax reform: OECD releases technical guidance for implementation of the global minimum tax
https://www.oecd.org/tax/international-tax-reform-oecd-releases-technical-guidance-for-implementation-of-the-global-minimum-tax.htm
«Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy»
[1] GloBE: Global Anti-Base Erosion
[2] «Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy»
