Navigating BEPS in Hong Kong: What Multinationals Must Know

Understanding BEPS and Its Global Impact

Base Erosion and Profit Shifting (BEPS) refers to sophisticated tax planning strategies employed by multinational enterprises (MNEs) that capitalize on discrepancies in tax rules across jurisdictions to artificially shift profits to low or no-tax locations. The Organisation for Economic Co-operation and Development (OECD), working with G20 countries, identified these practices as a significant threat to tax revenue collection worldwide, estimating annual losses of USD 100-240 billion globally, equivalent to 4-10% of global corporate income tax revenues.

In response, the OECD launched the BEPS Project in 2013, culminating in the publication of 15 Action Plans in October 2015. These actions provide governments with domestic and international instruments to ensure that profits are taxed where economic activities generating those profits are performed and where value is created. Hong Kong, as a leading international financial center and a responsible member of the global tax community, has progressively adopted BEPS measures to align with international standards while maintaining its competitive tax environment.

Hong Kong’s Commitment to International Tax Standards

Hong Kong’s approach to BEPS implementation reflects a careful balancing act: maintaining the jurisdiction’s attractiveness as a business and investment hub while meeting international obligations and preventing aggressive tax avoidance. The Hong Kong Special Administrative Region Government has implemented BEPS minimum standards in full, while taking a more selective approach to non-mandatory measures based on local circumstances and policy considerations.

The OECD BEPS 15 Actions: A Comprehensive Overview

The BEPS Action Plan consists of 15 specific actions, four of which constitute minimum standards that all participating jurisdictions have committed to implement. Understanding these actions is essential for multinational enterprises operating in or through Hong Kong.

Action	Description	Minimum Standard
Action 1	Address the tax challenges of the digital economy	No
Action 2	Neutralize the effects of hybrid mismatch arrangements	No
Action 3	Strengthen Controlled Foreign Company (CFC) rules	No
Action 4	Limit base erosion via interest deductions and other financial payments	No
Action 5	Counter harmful tax practices more effectively, taking into account transparency and substance	Yes
Action 6	Prevent treaty abuse through anti-abuse provisions including Principal Purpose Test (PPT)	Yes
Action 7	Prevent the artificial avoidance of permanent establishment (PE) status	No
Actions 8-10	Align transfer pricing outcomes with value creation (intangibles, risks and capital, other high-risk transactions)	No
Action 11	Measure and monitor BEPS through improved data collection and analysis	No
Action 12	Require taxpayers to disclose aggressive tax planning arrangements	No
Action 13	Re-examine transfer pricing documentation requirements, including Country-by-Country Reporting	Yes
Action 14	Make dispute resolution mechanisms (Mutual Agreement Procedure) more effective	Yes
Action 15	Develop a Multilateral Instrument (MLI) to modify bilateral tax treaties	No

Hong Kong’s Implementation of BEPS Minimum Standards

Hong Kong has fully implemented all four BEPS minimum standards (Actions 5, 6, 13, and 14), demonstrating its commitment to international tax cooperation and transparency. This implementation has been achieved through a combination of legislative amendments, administrative measures, and participation in multilateral agreements.

Action 5: Countering Harmful Tax Practices

Under BEPS Action 5, Hong Kong committed to the compulsory spontaneous exchange of information on tax rulings. This transparency framework ensures that certain advance tax rulings that could give rise to BEPS concerns are automatically shared with relevant tax authorities in other jurisdictions. Hong Kong has established administrative procedures to identify, collect, and exchange information on covered rulings, ensuring compliance with the minimum standard.

Action 6: Preventing Treaty Abuse

Hong Kong adopted the treaty anti-abuse provisions under Action 6 through its ratification of the Multilateral Instrument (MLI). The jurisdiction implemented the Principal Purpose Test (PPT), which denies treaty benefits when it is reasonable to conclude that obtaining those benefits was one of the principal purposes of an arrangement or transaction. This prevents treaty shopping and other forms of treaty abuse while maintaining legitimate commercial transactions.

Some of Hong Kong’s Comprehensive Double Taxation Agreements (CDTAs) that were not initially aligned with Action 6 requirements have been or are being modified through the MLI ratification process.

Action 13: Transfer Pricing Documentation and Country-by-Country Reporting

Hong Kong has fully implemented the three-tiered transfer pricing documentation framework mandated by Action 13, consisting of the Country-by-Country Report, Master File, and Local File. This is covered in detail in the following section.

Action 14: Enhancing Dispute Resolution

According to the OECD’s Stage 2 peer review report, Hong Kong meets most elements of the Action 14 minimum standard for making dispute resolution mechanisms more effective. The Inland Revenue Department (IRD) has established procedures to ensure that taxpayers can access the Mutual Agreement Procedure (MAP) as provided in Hong Kong’s tax treaties. Where deficiencies were identified in the initial review, Hong Kong has taken steps to address them, which has been monitored through the peer review process.

Transfer Pricing and Documentation Requirements

The Inland Revenue (Amendment) (No. 6) Ordinance 2018

On July 13, 2018, Hong Kong enacted comprehensive transfer pricing legislation through the Inland Revenue (Amendment) (No. 6) Ordinance 2018. This landmark legislation codified transfer pricing rules in Hong Kong law for the first time, incorporating the arm’s length principle consistent with OECD Transfer Pricing Guidelines. The key provisions became effective for years of assessment beginning on or after April 1, 2019.

The ordinance introduced several critical components:

• Arm’s Length Principle: Codified requirement that transactions between associated enterprises be conducted at arm’s length
• Transfer Pricing Documentation: Mandatory preparation of Master File and Local File
• Country-by-Country Reporting: Reporting obligations for large MNE groups
• Advance Pricing Arrangements (APAs): Statutory framework for unilateral, bilateral, and multilateral APAs
• Updated PE Provisions: Modernized permanent establishment definitions aligned with BEPS recommendations

Three-Tiered Documentation Structure

Hong Kong’s transfer pricing documentation framework follows the OECD’s three-tiered approach, providing tax authorities with increasingly detailed information at different levels:

Documentation Type	Scope	Preparation Deadline	Effective Date
Master File	High-level overview of the MNE group’s global business operations, transfer pricing policies, and global allocation of income and economic activity	9 months after accounting period end	Accounting periods beginning on or after April 1, 2018
Local File	Detailed information on specific material transactions between the Hong Kong entity and associated enterprises	9 months after accounting period end	Accounting periods beginning on or after April 1, 2018
Country-by-Country Report	Jurisdiction-by-jurisdiction reporting of revenue, profit, tax paid, economic activity, and business activities	12 months after fiscal year end	Fiscal years beginning on or after January 1, 2018

Exemption Thresholds for Master File and Local File

Recognizing the compliance burden on smaller entities, Hong Kong provides exemptions from Master File and Local File requirements. A Hong Kong entity is exempt if it satisfies any two of the following three conditions for the relevant accounting period:

• Total revenue does not exceed HK$400 million
• Total value of assets at the end of the period does not exceed HK$300 million
• Average number of employees during the period does not exceed 100

These thresholds ensure that documentation requirements are proportionate to the size and complexity of the business operations.

Country-by-Country Reporting (CbCR) Requirements

Revenue Threshold and Scope

Country-by-Country Reporting requirements apply to multinational enterprise groups that meet specific criteria. The consolidated group revenue for the preceding accounting period must be at least EUR 750 million (equivalent to approximately HK$6.8 billion as at January 2015), and the group must have constituent entities or operations in two or more tax jurisdictions.

The CbCR framework applies to fiscal years beginning on or after January 1, 2018. This means that for MNE groups with calendar year accounting, the first CbC Report would cover the fiscal year 2018 and would have been due by December 31, 2019.

Filing Obligations and Deadlines

A Hong Kong entity has a CbC reporting obligation if it is:

1. Ultimate Parent Entity (UPE): The Hong Kong-resident entity is the ultimate parent of the MNE group
2. Surrogate Parent Entity (SPE): The entity has been designated by the MNE group to file the CbC Report on behalf of the group
3. Secondary Filer: The UPE is in a jurisdiction that does not require CbCR, does not have a qualifying exchange agreement with Hong Kong, or has experienced a systemic failure in exchange

Two critical deadlines apply:

• CbC Notification: Within 3 months after the end of the reporting fiscal year, all Hong Kong constituent entities must notify the IRD which entity will file the CbC Report and in which jurisdiction
• CbC Report Filing: Within 12 months after the end of the reporting fiscal year, the complete CbC Report must be submitted electronically in XML format through the IRD’s CbCR e-filing portal

Information Required in CbC Reports

The CbC Report requires comprehensive information for each tax jurisdiction in which the MNE group operates, including:

• Revenues (separately disclosing related party and third-party revenues)
• Profit or loss before income tax
• Income tax paid (cash basis)
• Income tax accrued (current year)
• Stated capital
• Accumulated earnings
• Number of employees (full-time equivalents)
• Tangible assets other than cash and cash equivalents
• List of all constituent entities, their jurisdiction of incorporation, jurisdiction of residence, and main business activities

Automatic Exchange of CbC Reports

Hong Kong is a signatory to the Multilateral Competent Authority Agreement (MCAA) on the automatic exchange of Country-by-Country Reports. The IRD automatically exchanges CbC Reports with tax authorities in jurisdictions that have qualifying exchange agreements with Hong Kong under:

• The Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC)
• The Multilateral Competent Authority Agreement for CbC Reporting
• Bilateral tax treaties with specific exchange provisions

As of 2025, Hong Kong has activated exchange relationships for CbC Reports with over 57 jurisdictions worldwide, ensuring that tax authorities in relevant jurisdictions receive the information necessary for risk assessment.

Penalties for Non-Compliance

Hong Kong has implemented substantial penalties to ensure compliance with CbCR requirements:

Violation	Civil Penalty	Criminal Penalty
Failure to file CbC notification	Up to HK$50,000	–
Late filing of CbC notification	HK$500 per day after conviction	–
Failure to file CbC Report	Up to HK$50,000	–
Inaccurate or misleading CbC Report	Up to HK$50,000	–
Persistent non-compliance	Up to HK$100,000	–
Deliberate false information	–	HK$50,000 fine and up to 3 years imprisonment (on indictment)

BEPS 2.0: Pillar Two Implementation in Hong Kong

The Global Minimum Tax Framework

In July 2021, Hong Kong joined more than 140 jurisdictions in the OECD/G20 Inclusive Framework on BEPS in accepting the two-pillar solution to address tax challenges arising from the digitalization of the economy. The Financial Secretary announced in the 2024-25 Budget that Hong Kong would implement the global minimum tax in accordance with the BEPS 2.0 Pillar Two framework.

On June 6, 2025, the Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Ordinance 2025 was enacted, implementing Pillar Two’s Global Anti-Base Erosion (GloBE) Rules in Hong Kong law. This legislation establishes a global minimum corporate tax rate of 15% for large multinational enterprises.

Scope and Application

The Pillar Two rules apply to multinational enterprise groups meeting the following criteria:

• Revenue Threshold: Annual consolidated revenue of at least EUR 750 million in two or more of the preceding four fiscal years
• Multinational Operations: Constituent entities or permanent establishments in two or more jurisdictions

Certain entities are excluded from Pillar Two, including:

• Government entities
• International organizations
• Non-profit organizations
• Pension funds
• Investment funds or real estate investment vehicles that are ultimate parent entities

It is estimated that approximately 200-300 MNE groups headquartered in Hong Kong and around 3,000 foreign MNE groups with operations in Hong Kong will fall within the scope of these rules.

Key Components of Hong Kong’s Pillar Two Implementation

Hong Kong’s Pillar Two legislation consists of three interlocking components:

1. Income Inclusion Rule (IIR): Effective retroactively from January 1, 2025. The IIR imposes top-up tax on the parent entity of an in-scope MNE group with respect to its low-taxed constituent entities (those with an effective tax rate below 15%).
2. Hong Kong Minimum Top-Up Tax (HKMTT): Effective retroactively from January 1, 2025. The HKMTT is a domestic top-up tax that operates consistently with the GloBE rules and takes priority over the IIR and UTPR. This ensures that if Hong Kong constituent entities are taxed below 15%, the top-up tax is collected by Hong Kong rather than foreign jurisdictions, preserving Hong Kong’s taxing rights.
3. Undertaxed Profits Rule (UTPR): Implementation date to be determined by the Secretary for Financial Services and the Treasury. The UTPR serves as a backstop mechanism, ensuring that top-up tax is collected when it has not been fully collected under the IIR.

Filing Requirements and Deadlines

In-scope MNE groups must comply with two primary filing obligations:

Filing Type	Purpose	Deadline
Top-Up Tax Notification	Notifies the IRD that the group is in-scope and identifies the designated filing entity and jurisdiction providing the GloBE Information Return	Within 6 months after fiscal year end
Top-Up Tax Return	Contains the GloBE Information Return with detailed calculations of effective tax rates and top-up tax	Within 15 months after fiscal year end (18 months for transition years)

Example: For an MNE group with a fiscal year ending December 31, 2025:

• Top-up tax notification due: June 30, 2026
• Top-up tax return due: March 31, 2027 (extended to June 30, 2027 for the first transition year)

Safe Harbour Provisions

To reduce compliance burden, Hong Kong has adopted several safe harbours developed by the OECD. When certain conditions are met, in-scope MNE groups are relieved from performing full GloBE calculations:

• Transitional Country-by-Country Reporting Safe Harbour: Uses existing CbC Report data to determine eligibility for relief during the transition period
• Qualified Domestic Minimum Top-Up Tax (QDMTT) Safe Harbour: Provides relief when jurisdictions have implemented qualifying domestic minimum taxes
• Simplified Calculations Safe Harbour: Applies to non-material constituent entities, reducing computational complexity
• Transitional UTPR Safe Harbour: Provides temporary relief from UTPR calculations during the transition period

Mandatory Electronic Filing

Under the Pillar Two legislation, all Hong Kong constituent entities (Part 4AA entities) of in-scope MNE groups are required to file their profits tax returns electronically for the Year of Assessment 2025/26 and all subsequent years. The IRD is developing a Pillar Two Portal, which will be launched in phases:

• January 2026: Notification functions available
• October 2026: Return filing capabilities operational

Revenue Impact and Economic Considerations

The Hong Kong Government estimates that Pillar Two implementation will generate approximately HK$15 billion in additional annual tax revenue from fiscal year 2027-28 onward. However, it is important to note that many Hong Kong-based MNE groups may already have effective tax rates at or above the 15% threshold, meaning they would not be subject to additional top-up tax.

IRD Support and Guidance

The Inland Revenue Department has established a dedicated BEPS 2.0 team to provide technical support and answer enquiries regarding Pillar Two implementation. The IRD has also been proactively contacting in-scope MNE groups through bulk letters, requesting them to:

• Assess whether they belong to an in-scope MNE group
• Complete reply slips within two months of the letter’s issuance date
• Apply for MNE codes or Joint Venture (JV) codes using Form IR1485, which are mandatory for filing notifications and returns through the Pillar Two Portal

The IRD is committed to publishing online guidance addressing common concerns and providing clarity on technical issues as they arise.

Pillar One: Current Status and Future Prospects

What is Pillar One Amount A?

Pillar One Amount A represents a fundamental reform of international tax rules, providing for a coordinated reallocation of taxing rights over a portion of the profits of the largest and most profitable multinational enterprises to market jurisdictions (jurisdictions where customers are located, regardless of whether the MNE has a physical presence there). This addresses tax challenges arising from the digitalization of the economy, where value can be created in market jurisdictions without traditional physical presence.

Implementation Status: Delayed Indefinitely

Despite significant technical work, Pillar One Amount A implementation has faced substantial delays and remains uncertain. On October 11, 2023, the OECD released the text of the Multilateral Convention (MLC) to implement Amount A. However, as of early 2025, the MLC remains unsigned and is not yet open for signature due to lack of consensus among Inclusive Framework member jurisdictions.

Key challenges include:

• Political Opposition: Significant resistance from major economies, particularly the United States, where ratification by lawmakers appears highly unlikely
• Divergent National Interests: Countries including the US, Saudi Arabia, and India have been identified as blocking progress on Amount A
• Alternative Measures: Many jurisdictions have implemented or maintained unilateral digital services taxes (DSTs) pending an international solution, creating tension and potential trade retaliation risks

Requirements for Entry into Force

Even when opened for signature, the Multilateral Convention requires ratification by 30 States accounting for at least 60% of the ultimate parent entities of MNEs expected to be in-scope for Amount A. Given current political dynamics, meeting this threshold appears increasingly challenging.

Implications for Hong Kong Multinationals

For the time being, Hong Kong-based multinationals are not subject to Pillar One Amount A reallocation of taxing rights. However, companies should:

• Monitor developments in the Inclusive Framework negotiations
• Assess potential exposure if and when Pillar One is implemented
• Consider the impact of unilateral digital services taxes in jurisdictions where they operate
• Maintain flexibility in tax planning to adapt to potential future changes

The Multilateral Instrument (MLI) and Hong Kong’s Approach

Understanding the MLI

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI), developed under BEPS Action 15, offers a streamlined mechanism for jurisdictions to modify their bilateral tax treaties without negotiating amendments to each treaty individually. As of January 2025, 104 jurisdictions have signed the MLI, which entered into force on July 1, 2018.

The MLI enables implementation of tax treaty recommendations from the BEPS Project, including:

• Hybrid mismatch rules (Action 2)
• Tax treaty abuse prevention (Action 6 – Minimum Standard)
• Permanent establishment avoidance provisions (Action 7)
• Mutual Agreement Procedure improvements (Action 14 – Minimum Standard)

Hong Kong’s MLI Positions

Hong Kong has ratified the MLI, taking a selective approach that balances international commitments with domestic policy objectives:

Provisions Hong Kong Adopted (Opted In):

• Principal Purpose Test (PPT): To prevent treaty abuse and treaty shopping (Action 6 minimum standard)
• Mutual Agreement Procedure Enhancements: To improve dispute resolution mechanisms (Action 14 minimum standard)
• Arbitration Provisions: To ensure timely resolution of MAP cases

Provisions Hong Kong Opted Out Of:

• Comprehensive Hybrid Mismatch Rules: Hong Kong did not adopt the full suite of Action 2 hybrid mismatch provisions under the MLI
• Artificial Avoidance of PE Status: Certain Action 7 provisions were not adopted

Impact on Hong Kong’s Tax Treaty Network

The MLI modifies Hong Kong’s Comprehensive Double Taxation Agreements (CDTAs) with covered treaty partners. Hong Kong indicated that the ratification process was expected to be finalized during 2022, with treaty modifications taking effect on specified dates for different types of taxes. Taxpayers relying on Hong Kong’s tax treaties should carefully review:

• Which of Hong Kong’s treaties are covered by the MLI
• The specific modifications that apply to each covered treaty
• Effective dates for MLI provisions in relation to withholding taxes and other taxes
• The impact of the Principal Purpose Test on treaty benefit eligibility

Hong Kong’s Selective Approach to Non-Mandatory BEPS Actions

Hybrid Mismatch Arrangements (Action 2)

While Hong Kong opted out of comprehensive hybrid mismatch rules under the MLI, it has incorporated targeted anti-hybrid provisions within its Foreign-Sourced Income Exemption (FSIE) regime, enacted through the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022, effective January 1, 2023.

The FSIE regime includes an anti-hybrid rule that denies the participation exemption if dividend payments are deductible by the investee company, preventing deduction/non-inclusion (D/NI) hybrid mismatch arrangements. This targeted approach addresses specific BEPS concerns without implementing the full complexity of Action 2 recommendations.

Controlled Foreign Company Rules (Action 3)

Hong Kong has not implemented comprehensive Controlled Foreign Company (CFC) rules as recommended under BEPS Action 3. However, the FSIE regime operates as a functional equivalent in certain respects, requiring Hong Kong entities receiving certain types of foreign-sourced income to demonstrate economic substance or pay tax on that income. This approach maintains Hong Kong’s territorial tax principle while addressing BEPS concerns.

Interest Deduction Limitations (Action 4)

Hong Kong has not adopted specific interest deduction limitation rules based on BEPS Action 4 recommendations (such as fixed ratio rules or group ratio rules). The jurisdiction continues to allow deductions for interest expenses incurred for the production of taxable profits, subject to general anti-avoidance rules and the arm’s length principle in related-party contexts.

Mandatory Disclosure Rules (Action 12)

Hong Kong has not implemented mandatory disclosure rules requiring taxpayers to report aggressive tax planning arrangements as contemplated by BEPS Action 12. The jurisdiction relies instead on its existing transfer pricing documentation requirements, CbC reporting, and general compliance mechanisms to identify tax risks.

Practical Compliance Strategies for Multinationals

Immediate Action Items

Multinational enterprises with Hong Kong operations should take the following steps to ensure BEPS compliance:

1. Assess Scope of Applicability:
   • Determine whether your MNE group meets the EUR 750 million threshold for CbCR
   • Evaluate whether your group is in-scope for Pillar Two (same EUR 750 million threshold)
   • Identify all Hong Kong constituent entities and their filing obligations
2. Establish Robust Data Collection Processes:
   • Implement systems to gather financial and operational data from all global entities
   • Ensure data accuracy and consistency across Master File, Local File, and CbC Report
   • Prepare for Pillar Two effective tax rate calculations and GloBE Information Return requirements
3. Prepare and Maintain Transfer Pricing Documentation:
   • Develop comprehensive Master File covering global operations and transfer pricing policies
   • Prepare detailed Local Files for Hong Kong entities documenting material related-party transactions
   • Ensure documentation is prepared within the 9-month deadline after accounting period end
   • Conduct annual updates to reflect current year transactions and policies
4. Comply with CbC Reporting Obligations:
   • File CbC notifications within 3 months after fiscal year end
   • Submit complete CbC Reports in XML format within 12 months after fiscal year end
   • Maintain supporting documentation for all reported figures
   • Coordinate with group entities to avoid duplicate or conflicting filings
5. Prepare for Pillar Two Compliance:
   • Register for MNE codes using Form IR1485 if contacted by the IRD
   • Implement systems to calculate effective tax rates at the jurisdictional level
   • Assess eligibility for safe harbour provisions
   • File top-up tax notifications within 6 months after fiscal year end
   • Prepare for electronic filing of profits tax returns for all Hong Kong entities

Review Existing Structures and Arrangements

Given the evolving BEPS landscape, multinationals should conduct comprehensive reviews of existing structures:

• Transfer Pricing Policies: Ensure that intercompany transactions are documented with robust economic analysis and comply with the arm’s length principle
• Intellectual Property Arrangements: Verify that IP ownership, development, enhancement, maintenance, protection, and exploitation (DEMPE) functions align with economic substance
• Financing Structures: Review related-party financing arrangements to ensure compliance with arm’s length standards and assess potential hybrid mismatch risks
• Treaty Benefit Eligibility: Evaluate whether arrangements could be challenged under the Principal Purpose Test and strengthen commercial rationale documentation
• Permanent Establishment Risk: Assess whether business activities in various jurisdictions may create PE exposure under updated definitions

Leverage Hong Kong’s Continuing Tax Advantages

Despite BEPS implementation, Hong Kong retains significant advantages as a business and investment hub:

• Territorial Tax System: Income sourced outside Hong Kong generally remains tax-free (subject to FSIE regime requirements)
• Competitive Tax Rates: Two-tiered profits tax rates of 8.25% (first HK$2 million) and 16.5% (remainder) for corporations
• Extensive Treaty Network: Over 45 comprehensive double taxation agreements providing reduced withholding tax rates and treaty protection
• No Withholding Tax: Generally no withholding tax on dividends, interest, or royalties paid to non-residents (subject to certain exceptions)
• Robust Legal System: Common law jurisdiction with strong rule of law and protection of property rights
• Strategic Location: Gateway to Mainland China and Asia-Pacific markets

Engage Professional Advisors

Given the complexity of BEPS requirements and potential penalties for non-compliance, multinationals should consider:

• Engaging transfer pricing specialists to prepare documentation and conduct compliance reviews
• Consulting with international tax advisors on the implications of Pillar Two for global operations
• Working with Hong Kong tax professionals familiar with local IRD practices and procedures
• Obtaining advance pricing arrangements (APAs) for complex or material transfer pricing matters
• Seeking advance tax rulings on novel or uncertain tax positions

Future Developments and Ongoing Monitoring

Pillar Two Administrative Guidance

The OECD continues to release administrative guidance clarifying technical aspects of the GloBE Rules. Recent guidance has addressed issues such as currency conversion, transitional safe harbours, and treatment of specific industries. Hong Kong taxpayers should monitor both OECD guidance and IRD interpretations to ensure accurate compliance.

UTPR Implementation Timeline

While Hong Kong has enacted the Income Inclusion Rule and Hong Kong Minimum Top-Up Tax effective from January 1, 2025, the Undertaxed Profits Rule (UTPR) implementation has been deferred. The Secretary for Financial Services and the Treasury will specify the UTPR effective date at a later stage. Multinationals should monitor announcements regarding UTPR timing and prepare for additional compliance obligations when it is implemented.

Pillar One Developments

Despite current delays, the international community continues discussions on Pillar One. The January 2025 statement from the Co-chairs of the Inclusive Framework indicates ongoing efforts to reach consensus. Multinationals should stay informed about potential breakthroughs or alternative approaches that could affect cross-border business models.

Potential Amendments to Hong Kong Tax Legislation

As international tax standards evolve, Hong Kong may introduce further amendments to maintain alignment with global norms while preserving its competitive position. Areas to watch include:

• Potential adoption of additional BEPS measures currently not implemented
• Refinements to the FSIE regime based on practical experience
• Enhanced tax transparency and information exchange provisions
• Updates to transfer pricing guidance and acceptable methodologies

Regional Tax Competition and Coordination

Hong Kong’s BEPS implementation should be viewed in the context of regional tax developments. Singapore, another major Asian financial center, has taken a similarly selective approach to BEPS measures. Mainland China has implemented comprehensive transfer pricing rules and anti-tax avoidance provisions. Understanding the regional landscape is essential for effective tax planning across Asia-Pacific operations.

Conclusion: Navigating the New Tax Landscape

The BEPS initiative has fundamentally transformed international taxation, and Hong Kong has responded with measured implementation that balances global commitments with local competitiveness. For multinational enterprises, understanding and complying with Hong Kong’s BEPS measures is no longer optional—it is a critical component of responsible tax governance and risk management.

The key to successful navigation of this complex landscape lies in proactive compliance, robust documentation, and strategic planning that anticipates future developments. While BEPS implementation has increased compliance obligations, it has also created opportunities for multinational enterprises to demonstrate transparency, build trust with tax authorities, and optimize structures in alignment with substance and value creation.

Hong Kong remains an attractive jurisdiction for international business, offering a competitive tax environment, strategic location, and commitment to international standards. By understanding and meeting BEPS obligations, multinationals can leverage these advantages while managing tax risks effectively in an increasingly transparent global tax environment.