The Inland Revenue (Amendment) (No.6) Ordinance 2018 (the “Amendment Ordinance”) passed into law in July 2018, introduces statutory transfer pricing regime and implements various minimum standards under the Organisation for Economic Co-operation and Development (“OECD”)’s Base Erosion and Profit Shifting (“BEPS”) Action Plans. The Amendment Ordinance adopts the three-tier documentation structure, comprising a Master File, Local File and Country-by-Country Reporting (“CbCR”) recommended in the OECD BEPS Action Plan 131.
CBCR
With respect to CbCR, Hong Kong ultimate parent company of a multinational enterprise (“MNE”) group with prior year annual consolidated group revenue of HK$ 6.8 billion or above (approximately 750 million EURO), or a Hong Kong entity which is nominated as a surrogate filing entity, will be required to file a CbCR in Hong Kong, unless the surrogate parent entity-filing-elsewhere exception applies.
A CbCR has to be prepared for accounting periods beginning on or after 1 January 2018, with the primary obligation to file falling on the Hong Kong ultimate parent company or the nominated surrogate filing entity. Generally speaking, the deadline for filing a CbCR is within 12 months after the end of the accounting period to which the report relates. Where surrogate parent filing applies and a later deadline for filing CbCR is prescribed in the laws or regulations of the tax resident of the surrogate parent entity, the later deadline will be taken as the filing deadline for the CbCR concerned.
Country-by-Country (“CbC”) Notification
It should be noted that even if Hong Kong taxpayer does not have to prepare a CbCR because it is not an ultimate parent company or surrogate parent company of a MNE group, it may still need to file a CbC Notification. Hong Kong taxpayers that are constituent entities of a MNE group which has to file a CbCR overseas will have an obligation to file a CbC Notification to the Inland Revenue Department (“IRD”) within three months after the end of the accounting period to which the ultimate parent company’s CbCR relates. This is to enable the IRD to obtain the CbCR directly from the other tax authority through the automatic exchange of information mechanism for the exchange of CbCR22.
As such, for accounting period of the ultimate parent or surrogate parent beginning on or after 1 January 2018 and ending on 31 December 2018, Hong Kong entity of a MNE group has to file the CbC Notification by 31 March 2019. Only one Hong Kong entity of a MNE group having more than one Hong Kong entities has to comply with the requirement.
Penalties for non-compliance
Penalties will apply for non-submission of CbCR, including a HK$ 50,000 to HK$ 100,000 penalty plus a daily rate of HK$ 500.
Action
Our firm can assist to the designated Hong Kong entity of your group to prepare CbC Notification and prepare CbCR for the group. Please contact our team for details of the compliance requirements.
