Download OECD takes action on BEPS

News Flash
Hong Kong Tax
OECD takes action on BEPS; are
you ready?
July 2013
Issue 10
In brief
Following on from the report on Base Erosion and Profit Shifting (BEPS) published by the Organisation
for Economic Co-operation
operation and Development (OECD)
(OECD in February this year, the OECD published its
highly anticipated action plan (Action Plan) on 19 July 2013. The Action Plan contains 15 separate
actions or work streams to address BEPS,
BEPS along with accompanying targeted timelines.
Many off the issues addressed in the Action Plan will likely have less impact on the Hong Kong domestic
tax system, given its unique and simple nature,
nature, than will be the case elsewhere. IIt is also unlikely that
Hong Kong will revamp its tax policy in the shortt term as a result of the BEPS p
project. Hong Kong
businesses, however, particularly those with cross-border
border investments and /or operations, will not be
immune to BEPS related developments.
developments. These businesses need to be aware of such developments and
the possible impact
pact on their operations. More importantly, they need to proactively perform internal risk
assessments on their existing and contemplated
contempl
tax planning strategies and consider the sustainability
of such strategies in view of the
t increased focus on substance and transparency.
In detail
Background
The OECD has been
commissioned by the G20 to
carry out a study on BEPS.
BEPS The
BEPS project is driven by the
concerns of tax authorities that
(1) substantial tax revenue is
being lostt due to aggressive
planning by corporations aimed
at shifting profits to locations
with favourable tax regimes
regime and
(2) some common principles by
which taxing rights are
allocated between states have
not kept pace with the changing
business environment
(including the development of
digital economy and the
increased importance of
intellectual property as a value
driver in modern business
models). A report on BEPS was
issued by the OECD on 12
February 2013.
The report covered the
following:




A comprehensive diagnosis
of the current BEPS
concerns.
Examination of global
business models,
competitiveness, corporate
governance and their
relationships with taxation.
A detailed analysis of the
key tax principles and
opportunities for BEPS.
Identification of six key
pressure areas, being:
1) international
mismatches in entity
and instrument
characterisation
(including hybrid
mismatch
arrangements and
arbitrage);
2) application of treaty
concepts to profits
derived from the
delivery of digital
goods and services;
3) tax treatment of
related party debtfinancing, captive

insurance and other
intra-group financial
transactions;
4) transfer pricing; in
particular in relation to
the shifting of risks and
intangibles, the
artificial splitting of
ownership of assets
between legal entities
within a group and
transactions between
such entities that
would rarely take place
between independents;
5) effectiveness of antiavoidance measures, in
particular general antiavoidance rules,
controlled foreign
company regimes, thin
capitalisation rules and
rules to prevent tax
treaty abuse; and
6) the availability of
harmful tax
preferential regimes.
A call for a global action
plan to address BEPS.
For more details about the
BEPS project, please refer to
our PwC Tax Policy Bulletin,
April 2013 1.
www.pwchk.com
News Flash — Hong Kong Tax
OECD’s Action Plan on BEPS
Following on from the report on BEPS
published by the OECD in February
2013, the OECD published the Action
Plan on 19 July 2013, which contains
15 separate actions or work streams to
address BEPS, along with
accompanying targeted timelines.
For a more detailed discussion of the
content of the Action Plan and its
potential impact on governments and
businesses in general, please refer to
our PwC Tax Policy Bulletin, 19 July
2013 2. For the implications of the
BEPS project from the perspective of
China, please refer to our China Tax
and Business Advisory News Flash,
July 2013, Issue 17 3.
What to expect for Hong Kong
Hong Kong will not be in a position to
exert the same level of direct influence
in shaping responses to BEPS as those
countries that have been actively
involved in the BEPS project. In
addition, many of the issues addressed
in the Action Plan will be less likely to
have direct impact on the Hong Kong
domestic tax system given its unique
and simple nature. It is also unlikely
that Hong Kong will revamp its tax
policy in the short term as a result of
the BEPS project. With the increased
emphasis on transparency and
international collaboration to tackle
BEPS, however, there will
undoubtedly be pressure on Hong
Kong to increase cooperation with
other tax authorities in terms of tax
information exchange and tax
administration.
In particular, one of the important
points in the Action Plan is a call for
improvement on tax transparency,
including compulsory spontaneous
exchange on rulings to preferential
regimes and requiring substantial
activities for any preferential tax
regime. The recent passage of the
Inland Revenue (Amendment) Bill
2013 4 allows Hong Kong to enter into
standalone Tax Information Exchange
Agreements (TIEAs) and to have a
broader and more effective
information exchange with its
comprehensive double tax
arrangement/agreement (CDTA)/
TIEA partners. This, however, only
2
results in Hong Kong meeting the
current international standard on
Exchange of Information (EoI). Hong
Kong would likely need to further
enhance its EoI regime, for example to
permit automatic information
exchange, if it were to be able to
comply with the eventual outcomes of
this action point on tax transparency.
While the immediate impact of the
BEPS project on Hong Kong tax law
and administration may not be
evident, Hong Kong businesses,
particularly those with cross-border
investments and/or operations, will
not be immune to BEPS related
developments. For example, Hong
Kong groups investing abroad will
need to be cognisant of the more
challenging tax environment overseas
as a result of the increasing pressures
for transparency and 'substance' and a
lower tolerance for tax planning
considered artificial or contrived, and
tailor their existing and future
planning structures and strategies to
this new environment.
The focus on treaty shopping in the
Action Plan will also have implications
for Hong Kong. With the increasing
risk of challenge to treaty shopping
structures, the benefit provided to
Hong Kong enterprises investing
abroad by the large number of CDTAs
entered into by Hong Kong in recent
years is significant and timely. On the
other hand, foreign investors seeking
to use Hong Kong as a holding
company location to take advantage of
its new CDTAs are likely to face
unexpected levels of scrutiny and
challenge unless evidence that
substantial economic and physical
substance is maintained in Hong Kong
can be demonstrated. On a practical
level, the Hong Kong Inland Revenue
Department may be required to more
closely scrutinise applications for
certificates of Hong Kong tax resident
status as a result of pressure from
treaty partners.
It is also worth noting that even before
the initiation of the BEPS project, the
OECD was working on proposals in a
number of areas (such as beneficial
ownership and permanent
establishments) which are now also
dealt with in the Action Plan.
Accordingly, developments in these
areas are highly likely and will have an
impact in Hong Kong given that they
relate to the interpretation and
application of CDTAs, of which Hong
Kong has an ever increasing number.
The takeaway
Although the BEPS project is still a
work in progress, it has already had a
significant impact on the overall global
tax landscape. That is, regardless of
whether the action points identified in
the Action Plan will be applied
consistently and in a coordinated
manner by the tax authorities around
the globe, or how long the
implementation of such action points
will take, there are indications that the
BEPS initiative is leading to gradual
changes in the attitudes and
behaviours of governments and tax
authorities.
Businesses need to be aware of the
BEPS developments and the possible
impact on their operations and
actively engage in the BEPS debate to
try to ensure that final initiatives are
rational and workable. More
importantly, businesses should
proactively perform internal risk
assessments on their existing or
contemplated tax planning strategies
and consider the sustainability of such
strategies in view of the increased
scrutiny brought about by the BEPS
debate, particularly in relation to the
focus on substance and transparency.
This is important not only from the
perspective of dealings with tax
authorities, but also as a matter of
corporate governance in managing the
increasing risk of potential adverse
publicity arising from being seen as
engaging in aggressive tax planning.
Endnotes
1. The Tax Policy Bulletin can be accessed
via this link: http://www.publications.pwc.
com/DisplayFile.aspx?Attachmentid=654
1&Mailinstanceid=27423
2. The Tax Policy Bulletin can be accessed
via this link: http://www.publications.pwc.
com/DisplayFile.aspx?Attachmentid=67
65&Mailinstanceid=28037
3. The News Flash can be accessed via
this link: http://www.pwchk.com/web
media/doc/635103485730099674_china
tax_news_jul2013_17.pdf
4. Please refer to our Hong Kong Tax
News Flash, July 2013, Issue 8 which
can be accessed via this link:
http://www.pwchk.com/webmedia/doc/63
5095632258504134_hktax_news_jul201
3_8.pdf.
PwC
News Flash — Hong Kong Tax
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