The BEPS Action Plan in China and Hong Kong: Impact Assessment for Foreign Enterprises
By Jake Liddle
In October 2016, Hong Kong’s government issued a consultation paper for implementing measures to counter base erosion and profit shifting (BEPS) in the region.
BEPS refers to tax planning strategies that exploit discrepancies in tax laws in order to shift profits to jurisdictions where there are lower tax rates, often tax havens. While some methods are illegal, many are not, and can disrupt domestic market competition and undermine taxation systems. Because of their reliance on income tax, BEPS is particularly relevant to developing countries. The Organization for Economic Co-operation and Development (OECD) and G20 countries have formed an ‘inclusive framework’, which implicates over 100 jurisdictions to cooperatively implement the OECD/G20 BEPS package, a tool that provides governments with the means to tackle BEPS on domestic and international levels.
As a key member of the inclusive framework and as an international finance center, Hong Kong indicated its intent to join the OECD scheme in June 2016. The consultation paper highlights the government’s commitment to implementing the BEPS package consistently, marking the start of a potentially long process of aligning its domestic tax system with the latest international tax standards. Hong Kong will do this by revising domestic laws in order to facilitate its smooth implementation, and aims to fully introduce it in the middle of this year.
The consultation paper outlines key areas of the BEPS package that will be given priority for implementation, namely:
- The transfer pricing regulatory regime;
- Transfer pricing documentation and country by country reporting;
- Anti-treaty abuse rules in comprehensive double tax agreements (CDTAs);
- Multilateral instruments;
- Statutory cross border dispute resolution mechanisms;
- Spontaneous exchange of information (EOI) regarding tax rulings; and,
- Enhancement of the tax credit system.
Although Hong Kong will implement the four minimum standards of the OECD BEPS package, and the above priority measures, it will also maintain a simple and low tax regime. BEPS is a more pertinent issue for Hong Kong, as the region is often used as a base and gateway by multinationals to access Mainland China due to its legal autonomy and relative tax freedom.
Though not as pressing for the Mainland, it has maintained a positive approach to the OECD BEPS package, and is an active purveyor of the scheme. China’s particular attention to the BEPS package can be put down to the country’s implementation of the so called tax reform plan, which aims to reform the tax collection and administration system of tax bureaus on both local and state levels. And in 2014, President Xi Jinping pledged support for the inclusive framework and global tax reform. Since, China has hosted the G20 and the OECD Forum on Tax Administration. The State Administration of Taxation (SAT) has been instrumental in implementing BEPS related regulation, translating and publishing all BEPS reports in Chinese, participating in the formulation of the BEPS project, and forming a domestic BEPS task force. Tax laws and treaties have been revised by SAT in order for the BEPS package to have optimum effect in China, including regulation pertaining to transfer pricing, anti-avoidance rules, and financial and tax EOI. Thus China’s regulatory environment and tax authorities’ behaviours are changing accordingly.
Impact assessment for investors
As a holistic program in itself, the BEPS action plan poses a significant change not only for international tax law, but also for how individual jurisdictions interact and operate. This applies to both Hong Kong and China, two regions proactively dedicated to implementing the OECDs BEPS package. Thus, it is of key importance for multinational enterprises and investors to take heed of the changes, keep on top of updates to regulation, and, in particular, adjust internal operation to reflect the changes in the international and domestic tax environments. A good way to start this process is to conduct a BEPS impact assessment, so that operation is sufficiently calibrated with the changing tax compliance requirements. Preparations should also be made for wider BEPS plans outside of China and Hong Kong in order to fully comply in the international tax environment.
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