Second Reading of Government Bills： INLAND REVENUE (AMENDMENT) (MINIMUM TAX FOR MULTINATIONAL ENTERPRISE GROUPS) BILL 2024
President, I submit the report in my capacity as Chairman of the Bills Committee on Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Bill 2024. The Bill seeks, in accordance with the international tax reform framework “Base Erosion and Profit Shifting” (“BEPS 2.0”) promulgated by the Organisation for Economic Co-operation and Development (“OECD”), to implement a global minimum tax of 15% and introduce the Hong Kong minimum top-up tax (“HKMTT”) for multinational enterprise (“MNE”) groups with annual consolidated revenue of at least €750 million in at least two of the four fiscal years immediately preceding the current fiscal year.
The Bills Committee has held two meetings and invited written submissions from the public. Members generally support the Bill, with a view to fulfilling Hong Kong’s international obligations to tackle cross-border tax evasion and safeguarding Hong Kong’s taxing rights.
Some members have expressed concern about the impact of the implementation of the global minimum tax and HKMTT on Hong Kong’s tax revenue. They have enquired about the criteria adopted by the Administration for estimating that the above tax measures will bring an additional tax revenue of about $15 billion per year from 2027-2028 onwards after its implementation.
The Administration has advised that the Inland Revenue Department (“IRD”) has been requesting over the past few years MNE groups with annual consolidated revenue of €750 million to submit annual country-by-country reports to IRD, setting out information such as their revenues and tax expenses in Hong Kong and other jurisdictions. An additional annual tax revenue of $15 billion is a preliminary estimate made by IRD based on the information in the country-by-country reports and the minimum tax rate of 15%. The Administration has further pointed out that a country-by-country report only reflects the annual consolidated revenue of an MNE group amounting to €750 million in the preceding fiscal year. As the groups may also make structural adjustments in response to these new tax measures, which may thus affect their tax expenses, coupled with IRD’s lack of detailed information on each of the Hong Kong constituent entities of these MNE groups, the amount of additional tax revenue mentioned above is only a very rough estimate.
In view of various tax incentives provided by the Government to facilitate the development of specific industries and attract overseas enterprises to come to Hong Kong, members and the Legal Adviser to the Bills Committee have enquired the Administration whether the implementation of the Global Anti-Base Erosion Rules (“GloBE rules”) will adversely affect the benefits derived by in-scope MNE groups covered by the Bill from the concessionary tax treatments under the Inland Revenue Ordinance, e.g. tax concessions for income relating to aircraft leasing and intellectual property rights.
The Administration has explained that while some entities of in-scope MNE groups may be paying lower tax under the concessionary tax treatments, whether the group is required to pay top-up tax depends on whether its jurisdictional effective tax rate in Hong Kong is below 15%. Regarding the prevailing tax concessions in Hong Kong, the Administration has advised that such measures are applicable to businesses operating in Hong Kong, which is in line with OECD’s minimum standards on non-harmful tax practices, i.e. the concessionary tax treatments should not favour local enterprises while imposing additional taxes on other foreign enterprises.
Some members have pointed out that Hong Kong has all along been practising a simple and low tax regime and the territorial source principle of taxation, whereby foreign-sourced income is generally exempt from profits tax under Part 4 (“Part 4 profits tax”) of the Inland Revenue Ordinance, and that there is no capital gains tax and dividend tax in Hong Kong. However, after the implementation of the global minimum tax and HKMTT in Hong Kong, in-scope MNE groups may be subject to top-up tax on the said income and profits. Members have enquired how the Administration will continue to publicize Hong Kong’s tax advantages in order to attract more enterprises to set up presence in Hong Kong.
The Administration has explained that the implementation of global minimum tax and HKMTT in Hong Kong aims to align with the latest international tax standards, and the relevant measures are not targeted at offshore income or profits of a capital nature. Hong Kong will maintain its practice of not imposing Part 4 profits tax on capital receipts, implying that no new taxes are thus introduced in Hong Kong.
On tax competitiveness, the Administration has advised that more than 140 jurisdictions around the world have agreed to participate in the BEPS 2.0 framework, and the outcomes achieved by Hong Kong and other jurisdictions in implementing the global minimum tax will need to be in line with the target outcomes set out in the OECD GloBE model rules, commentaries and administrative guidance. Therefore, the simple and low tax regime maintained in Hong Kong still has a competitive edge over other jurisdictions. In addition, jurisdictions that used to compete for business and enterprises with low or zero tax rates will no longer be able to attract enterprises to set up business with their tax policies. Moreover, Hong Kong’s unique advantages under “one country, two systems”, coupled with its excellent infrastructure, pool of talents and status as an international financial centre, etc., will sharpen Hong Kong’s competitive edge after other jurisdictions begin implementing BEPS 2.0.
The Bills Committee has also discussed issues such as the charging mechanism, proposed new offences and commencement date. In the light of the views and suggestions made by members and deputations, as well as the administrative guidance promulgated by OECD after the gazettal of the Bill, the Administration will propose amendments to the Bill. The Bills Committee has raised no objection to these amendments and will not propose any amendments to the Bill.
The Bills Committee has completed the scrutiny of the Bill and the details are set out in its report to the Council.
President, the following are my personal views on the Bill. First of all, I would like to declare that the financial institution that I work for is an in-scope MNE group as referred to in the Bill.
Tax revenue is an important source of stable revenue for the Government. The collection of the right amount of tax will not only strike a balance in the allocation of social resources, but also indirectly create a more favourable environment for the development of enterprises. Governments around the world have the responsibilities to review and adjust the existing tax policies in the light of changes in social development.
MNE groups have established operations in many jurisdictions around the world, and the tax policies of different jurisdictions are very different from one another. Under the business philosophy of maximizing benefits and mitigating risks and the “profit first” principle, enterprises are keen to set up presence in low-tax jurisdictions in order to reduce tax burdens. As a result, different jurisdictions have scrambled to lower corporate profits tax so as to attract enterprises, and the vicious competition will ultimately affect the tax revenue of the governments.
To address the above issues, over 130 jurisdictions around the world, including the Mainland, have currently accepted the solution announced by OECD. I strongly support the SAR Government, having regard to the actual situation in Hong Kong, to implement HKMTT in accordance with the mechanism on the GloBE rules, with a view to increasing the Government’s tax revenue and mitigating the risk of the erosion of tax base in Hong Kong as a result of the adjustment of the international tax regime. The Bill is only applicable to MNE groups with consolidated revenue of €750 million or more in at least two of the four fiscal years immediately preceding the current fiscal year, and it will not affect the majority of small and medium enterprises (“SMEs”) in any way.
Given that the Bill has largely incorporated the original requirements laid down by OECD, members have focused on scrutinizing the details involving its implementation in Hong Kong.
I am glad to see that the Government has taken on board the views and suggestions put forward by members of the Bills Committee and the general public (especially professional tax organizations) during the deliberation, thereby enhancing the accuracy and clarity of the expressions in the Bill, and dispelling the misgivings by minimizing the compliance burden of enterprises, streamlining the administrative procedures, and imposing stringent prosecution requirements and penalties, etc. Meanwhile, the Government has also provided clear explanations to other questions raised by Members. I would like to thank the Financial Services and the Treasury Bureau and IRD for their meticulous responses during the scrutiny of the Bill.
Over the years, low tax rate and tax relief have served as effective means to attract enterprises to come to Hong Kong and support their development. The SAR Government has successively introduced a number of tax concessionary policies covering shipping, aviation, insurance and other industries. Since 2000, this Council has scrutinized a total of 59 bills relating to taxation, the majority of which revolve around the reduction of profits tax for enterprises, e.g. the Inland Revenue (Amendment) (Profits Tax Concessions for Insurance-Related Businesses) Bill 2019 and the Inland Revenue (Amendment) (Aircraft Leasing Tax Concessions) Bill 2023.
Upon the implementation of the Bill, different jurisdictions can no longer rely on just one trick and employ tax reduction as a means of competition. While the standard rates of profits tax in the United States, the United Kingdom, Japan and Singapore are 21%, 19%, 23.2% and 17% respectively, the headline tax rate of Hong Kong’s profits tax at 16.5% is still competitive internationally. Coupled with the fact that the SAR Government has provided profits tax concessions for six consecutive years and adopted a simple and transparent two-tier tax rates regime over the years, I believe in-scope MNE groups will still realize the superiority of Hong Kong with the comprehensive implementation of the GloBE rules.
At the same time, various tax incentives provided by the SAR Government to facilitate the development of specific industries meet OECD’s minimum standards on non-harmful tax practices, and thus the implementation of the Bill will not adversely affect the relevant benefits. Investment entities and insurance investment entities are excluded from the scope of HKMTT and we will maintain the practice of not imposing profits tax on capital receipts.
According to the latest government statistics, the number of business operations with parent companies located outside Hong Kong was around 9 960 in 2024, mainly from the Mainland, the United States, Japan, etc., whereas the numbers stood at 9 039 and 8 978 in 2023 and 2022 respectively. The number of enterprises has continued to grow during the three-year period. These enterprises have chosen to set up presence in Hong Kong not only because they are attracted by the simple and low tax regime, but they have also regarded other factors such as Hong Kong’s legal system, geographic location, free port status, free flow of information, clean government, and enormous business opportunities arising from its close proximity to the Mainland as the competitive advantages of Hong Kong. The statistics have shown that 12% of the enterprises have planned to expand their businesses in Hong Kong in the next three years. We can see that MNEs usually give holistic consideration to various factors before launching businesses. Apparently, the ultimate competitiveness of a region cannot be determined by a single factor, but rather policy coordination in various aspects is required for creating a favourable business environment.
On the other hand, there were about 360 000 SMEs in Hong Kong in 2024, accounting for over 98% of the total number of Hong Kong’s business units. SMEs are the mainstay of Hong Kong’s economic development. They will not only continue to enjoy the profits tax concessions, but will also benefit from 74 funding schemes provided by the Government. Although the Bill will affect some MNEs, various support measures can still attract more SMEs to set up operation in Hong Kong.
President, business environment encompasses factors such as market scale, economic stability, the degree of rule of law, infrastructure facilities, labour quality, social and culture factors. We have enjoyed the traditional advantages such as a free and open market environment, a stringent rule of law system, and the status as an international financial centre. However, with the evolving economic environment and increasingly fierce geopolitical competition, Hong Kong still needs to make efforts in respect of industrial structure, business cost, innovation and transformation, etc. With the comprehensive implementation of the GloBE rules, Hong Kong must further remedy the existing shortcomings of the business environment, maintain and enhance its overall strengths and competitiveness, and avoid over-reliance on the advantage of the single tax rate.
President, I support the Bill and all the amendments. I so submit.