The Hong Kong Inland Revenue Department has announced the start of the legislative process to give effect to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) in Hong Kong. China deposited on behalf of Hong Kong the instrument of ratification for the MLI on 25 May 2022 and the MLI entered into force for Hong Kong on 1 September 2022. However, Hong Kong has taken the reservation that the MLI will not be effective until additional internal procedures have been completed for each covered agreement and notification on the completion of the procedures is deposited.
Government starts legislative process to give effect to Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting in Hong Kong
The Inland Revenue (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting) Order will be gazetted on September 30 and tabled at the Legislative Council (LegCo) on October 19 for negative vetting. The order will enable Hong Kong to implement the Base Erosion and Profit Shifting (BEPS) package promulgated by the Organisation for Economic Co-operation and Development (OECD).
BEPS refers to tax avoidance strategies of multinational enterprises in exploiting the gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity. Hong Kong indicated to the OECD in June 2016 its commitment to implementing the BEPS package. The relevant tax treaty-related measures include preventing the abuse of Comprehensive Avoidance of Double Taxation Agreements/Arrangements (CDTAs) and improving the dispute resolution mechanism provided for in CDTAs.
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument) developed by the OECD aims to ensure swift, co-ordinated and consistent implementation of tax treaty-related BEPS measures in a multilateral context. It obviates the need for cumbersome bilateral tax treaty negotiations amongst jurisdictions for modifying the relevant tax treaty provisions in a piecemeal manner. As at September 16, 2022, 99 jurisdictions, including Hong Kong, have joined the Multilateral Instrument.
When a public consultation exercise regarding the proposed implementation strategy for the BEPS package was conducted in end-2016, the Government received feedback in support of the use of the Multilateral Instrument for obviating the need to individually amend bilateral tax treaties and providing greater tax certainty.
China became a signatory to the Multilateral Instrument in 2017, and deposited the instrument of approval of the Multilateral Instrument with the OECD in May 2022. Having sought the views of the Government of the Hong Kong Special Administrative Region, the Central People's Government extended the application of the Multilateral Instrument to Hong Kong. The provisions of the Multilateral Instrument will take effect in Hong Kong after completion of the domestic legislative procedures.
Hong Kong has listed 39 CDTAs it signed with its trading partners as treaties that are intended to be covered by the Multilateral Instrument. The remaining six signed CDTAs of Hong Kong are not listed because they have already incorporated BEPS-compliant provisions. The provisions of the Multilateral Instrument will have effect in Hong Kong with respect to a covered tax treaty on April 1, 2023 (for taxes withheld at source), or on April 1, 2024 (for other taxes), at the earliest, the exact dates of which are subject to the completion of the legislative and other relevant procedures of the Multilateral Instrument by Hong Kong's tax treaty partners.
To facilitate stakeholders' understanding of the effect of the Multilateral Instrument on individual CDTAs of Hong Kong, the Inland Revenue Department will publish on its website information as to when and how the covered CDTAs will be modified under the Multilateral Instrument.