On 31 July 2017, the Hong Kong SAR Government (the Government) released its consultation report on the measures to implement the base erosion and profit shifting (BEPS) minimum standards into the Hong Kong Inland Revenue Ordinance (IRO) (the Report) following its consultation exercise in October to December 2016. The Report gives a strong indication of the contents of the legislation that will now be put to the Legislative Council (LegCo) – either as part of a BEPS bill before the end of 2017 (covering transfer pricing, dispute resolution and country-by-country (CbC) reporting), or via a multilateral instrument (MLI) bill by mid-2018.
The main headlines on what is coming are as follows:
- The codification of transfer pricing rules to cover domestic and cross-border transactions.
- Mandatory transfer pricing documentation requirements, with some sensible exemptions, and a general approach of following general Organisation for Economic Co-operation and Development (OECD) guidelines.
- A proposed stringent penalty regime.
- An advance pricing arrangement (APA) regime to include unilateral, bilateral and multilateral APAs.
- In terms of timing of legislation, draft legislation is coming later this year (we currently anticipate a BEPS bill to go to LegCo in October and enactment to happen by end-2017). This will be supplemented by Inland Revenue Department (IRD) issuing Departmental Interpretation and Practice Notes (DIPNs).
- In terms of timing of actions needed, we currently anticipate the legislation to be effective from 2018. However, there may be good practical reasons for taxpayers to take action now (to cover 2017).
- Service providers can prepare and file CbC reports on behalf of the reporting entities.