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Hong Kong: The Inland Revenue (Amendment) (No. 6) and (No. 7) Bills 2017

The Inland Revenue (Amendment) (No. 6) and (No. 7) Bills 2017 were gazetted on 29 December 2017.  No. 7 Bill has recently been passed by the Legislative Council , and it has been indicated that there will be amendment to No. 6 Bill.  The objective of No. 7 Bill is to introduce a two-tiered profits tax rates system in the year of assessment (YOA) 2018/19 for the benefit of small and medium enterprises, under which the profits tax rate on the first HK$2 million of assessable profits will be reduced from 16.5% to 8.25% for corporations, and from 15% to 7.5% for persons other than corporations.  The profits tax rate for assessable profits over the first HK$2 million will be 16.5% for corporations and 15% for persons other than corporations as in past years without a reduction.  No. 6 Bill is to put in place to implement certain BEPS Project measures such as transfer pricing and country by country reporting (CbC) requirements which are in line with the OECD guidelines.

Two tier profits tax rates

  • Profits tax rate for the first HK$2 million of assessable profits is lowered to 8.25% for corporations and 7.5% for unincorporated business from YOA 2018/19.
  • Can only nominate one entity to enjoy the above reduced profits tax rate for a year of assessment among those which are connected.
  • Not applicable to captive insurers, reinsurers, corporate treasuries, aircraft lessors and aircraft leasing managers which are enjoying industry-specific tax incentives in Hong Kong. Also, the preferential profits tax rate for qualifying debt instruments will not be affected by the two-tiered profits tax rates regime.

Proposed new transfer pricing regulation

  • Proposed to be effective from YOA 2018/19 with exceptions. For instance, the documentation requirement may be effective from a later YOA.
  • First YOA subject to master and local files requirements in Hong Kong: D code cases (December accounting year-end): YOA 2019/20; M code cases (January / February / March accounting year-end): YOA 2018/19; N code cases (other accounting year-end): YOA 2019/20
  • Exemption from master and local files requirements can be based on size of business or on value of related party transactions. Companies not meeting the exemption criteria are required to prepare master file and the relevant local files under the transfer pricing documentation requirements#.
  • As for CbC reporting, the proposal follows the mandated requirement of the OECD. Multinational enterprise groups with annual consolidated group revenue of not less than HK$6.8 billion (for the preceding accounting period) and having constituent entities or operations in two or more jurisdictions would be required to file CbC reports.
  • First YOA subject to CbC reporting requirement in Hong Kong: D and M code cases: YOA 2018/19; N code cases: YOA 2019/20
  • First YOA subject to arm’s length requirements in Hong Kong: YOA 2018/19, but not applicable to transactions entered into or effected before the commencement date of the new transfer pricing regulation.
  • The new transfer pricing regulation will also apply to transactions between head office and branches.

# Subsequent to the gazettal of No.6 Bill, it has been indicated that there would be relaxation of the transfer pricing requirements in relation to related party transactions among Hong Kong entities.