The Deputy Commissioner of Inland Revenue (Deputy CIR) has recently commented on the implementation of the BEPS project in Hong Kong. One clear message that has emerged is that Hong Kong will need to respond to the rewritten international tax rules and update its tax system and legislation, at least in certain areas.
In implementing the BEPS project, priority will be given to the four BEPS action points where there are agreed minimum standards, namely (1) review of harmful tax practices and spontaneous exchange of information on certain tax rulings (Action 5), (2) model anti-treaty abuse provisions in tax treaties (Action 6), (3) country-by-country (CbC) reporting requirements and automatic exchange of CbC reports (Action 13) and (4) improvements in cross-border tax dispute resolution (Action 14). In particular, transfer pricing (TP) legislation and TP documentation requirements are likely to be the top priority. The Deputy CIR also hinted that the simplified limitation on benefits (LOB) rule plus the principle purposes test (PPT) will probably be the norm for Hong Kong tax treaties in the future.
With the likelihood of introduction of specific TP legislation and documentation requirements in Hong Kong, groups with cross-border related party transactions will need to prepare themselves for closer scrutiny by the IRD on TP-related issues and greater disclosure of TP-related information of the groups. With the possible incorporation of the simplified LOB rule and the PPT into the Hong Kong tax treaties, companies that hold their investments through Hong Kong investment holding platforms will need to review and assess whether their current structures can fulfil the conditions imposed by the new anti-treaty shopping rules and withstand potential challenges from Hong Kong's tax treaty partners, and evaluate the options available to ensure the sustainability of such structures under the new rules.
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