Hong Kong’s Legislative Council on 4 July 2018 passed the Inland Revenue (Amendment) (No. 6) Bill 2017 (“Bill”), which became effective on 13 July 2018 following the signature of the Chief Executive and publication in the Ggazette. The Amendment Bill No. 6 adopts the Organisation for Economic Co-operation and Development (“OECD”) recommended three-tiered documentation structure, comprising a Master File, Local File and the Country by Country (“CbC”) Reporting (“CbCR”).
Master File and Local File
Master File and Local File for each accounting period beginning on or after 1 April 2018 Hong Kong taxpayers are required to be prepare and keep on record a master and a local filed unless exemption applies.
Hong Kong entity (i.e. Hong Kong tax resident or Permanent Establishment (“PE”) in Hong Kong, of a group, etc.) must prepare Master File and Local File, within 9 months after the end of each accounting period and shall retain the files for a period of not less than 7 years after the end of the accounting period of the entity.
The local file and master file should be prepared in English or Chinese and the contents should cover the items of information, and reflect the format in line with the OECD’s requirements. For details of information included, please refer to Schedule 17I proposed in the Bill.
Taxpayers will be exempt from the Master File and Local File requirements if they satisfy either one of the following exemptions criteria:
| 1.Exemption based on size of the business | ||
| Total annual revenue | <=HK$400 million | Taxpayers meeting any two of the three conditions are not required to prepare the master file and local file. |
| Total assets | <=HK$ 300 million | |
| Average no. of employees | <=100 employees | |
| 2.Exemption based on value of related party transactions (excluding domestic transactions) | ||
| Transfer of properties (other than financial assets and intangible) | <=HK$220 million |
If the amount of related party transactions is below the threshold for the relevant accounting period, a local file will not be required for the category of transactions. If a taxpayer does not need to prepare a local file for all of the specified categories of related party transaction, the taxpayer is not required to prepare master file as well. |
| Transaction of financial assets/transfer of intangibles | <=HK$110 million | |
| Any other transaction | <=HK$44 million | |
Penalties of failing to prepare Master File and Local File
The taxpayers who fail to prepare master file and local file documentation without reasonable excuse are liable to a Level 5 fine (HK$50,000), and may be ordered by the court to prepare such documentation within a specified time. Failure to comply with that order carries a Level 6 fine (HK$100,000) on conviction.
Country by Country Reporting (“CbCR”)
CbCR Reporting is a minimum standard formulated by OECD under Action 13 of the Base Erosion and Profit Shifting Package.
Under this standard, a multinational enterprise group (“MNE Group”) is required to file a CbCR report in relation to an accounting period where:
1) The consolidated group revenue for the preceding accounting period is at least Euro750 million (or HK$6.8 billion); and
2) The group has constituent entities or operations in two or more jurisdictions.
A Hong Kong Entity of a reportable group whose UPE is not resident in Hong Kong is subject to a secondary obligation of filing a CbC Return if any of the following conditions is met:
- the UPE is not required to file a CbC Report in its jurisdiction of tax residence;
- the jurisdiction has a current international agreement with Hong Kong providing for automatic exchange of tax information but, by the deadline for filing the CbC Return, there is no exchange arrangement in place between the jurisdiction and Hong Kong for CbC Return;
- there has been a systemic failure to exchange CbCR by the jurisdiction, which has been notified to the Hong Kong Entity by the Commissioner.
Even if one of the above conditions is met, the Hong Kong Entity is not required to file a CbC Return if:
- a CbC Return for the relevant accounting period is filed by another Hong Kong Entity of the reportable group; or
- the reportable group has authorized a constituent entity as its surrogate parent entity (SPE) to file CbC Report on behalf of the Group, and the CbCR Report is filed by the SPE in Hong Kong or a jurisdiction which has an exchange arrangement in place with Hong Kong.
Automatic Exchange of CbC Reports
The Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Multilateral Convention) will be the main platform for Hong Kong to exchange CbC Reports with other jurisdictions. So far, Hong Kong has made such bilateral arrangements with France, Ireland, South Africa and United Kingdom.
Penalties of failing to file CbC Reporting
Penalties are provided in respect of matters such as failing to completefile CbC Reporting or to file notifications without reasonable excuse, providing misleading, false or inaccurate information, or omitting information in CbC Report. Depending on the seriousness of the case, penalty is set at a fine of HK$10,000 with imprisonment for 6 months (on summary conviction) or a fine of HK$50,000 with imprisonment for 3 years (on conviction on indictment).
Point to note
Accordingly, multinational corporations or any enterprises with cross border activities should review their existing operating and tax/transfer pricing structures to evaluate their ability to meet these new regulations mentioned as above. Our experienced tax specialists can advise clients on tax compliance services including transfer pricing consulting in Hong Kong and China.
