Major Overhaul of the International Taxation Rules and Implications for Hong Kong

The Organization for Economic Co-operation and Development (OECD) initiated a Base Erosion and Profit Shifting (BEPS) project in 2013 and issued a set of Action 1–15 Reports in 2015. The BEPS Action 1–15 Reports, which could now be known as BEPS 1.0, mainly focused on aligning taxation with economic substance and avoiding non-taxation of income due to the inconsistencies between international tax systems. Since the BEPS 1.0 measures have only been implemented in various jurisdictions recently, their impacts are yet remained to be determined. However, the OECD makes further steps in 2019 by publishing another set of proposed measures to ensure cross-border businesses are paying their fair share of taxes across all the jurisdictions they operate. The proposed measures, which are commonly known as BEPS 2.0,1 are not limited to digitalization of economy, but are applicable to all businesses with cross-border activities. The proposed measures are divided into two pillars. Pillar One looks at the implications of the digitalization of the economy and the possible changes on international tax systems. It allocates the taxing rights for cross-border activities based on a set of revised nexus and profit allocation rules. Pillar Two looks at broad proposals to effectively introduce a global minimum tax. It gives the residence and source jurisdictions a right to tax untaxed/undertaxed income where the income is taxed an effective rate below a certain minimum rate.

The BEPS 2.0 proposed measures will change the global tax landscape significantly by changing how profits are allocated between jurisdictions and introducing a new global minimum tax. At the timing of writing, the OECD has released a package of documents in January 2020 that provides the work progress and lays out a revised programme of work. This study firstly outlines the background of the BEPS 2.0 proposed measures. It then identifies the key elements of the proposed measures and examines the impact assessment. This study finally explores the challenges that the BEPS 2.0 proposed measures may bring to the Hong Kong tax regime and multinational enterprises (MNEs).