Harmful Tax Practices – 2017 Peer Review Reports on the Exchange of Information on Tax Rulings

Hong Kong (China)

Hong Kong (China) (“Hong Kong”) has met all of the terms of reference (ToR) for the calendar year 2017 (year in review) and no recommendations are made.

Hong Kong can legally issue four types of rulings within the scope of the transparency framework.

In practice, Hong Kong issued one past ruling; and for the year in review, Hong Kong issued no future rulings within the scope of the transparency framework.

No peer input was received in respect of the exchanges of information on rulings received from Hong Kong.

Introduction

498.  This peer review covers Hong Kong’s implementation of the BEPS Action 5 transparency framework for the year 2017. The report has four parts, each relating to a key part of the ToR. Each part is discussed in turn. A summary of recommendations is included at the end of this report.

A. The information gathering process

499.  Hong Kong can legally issue the following four types of rulings within the scope of the transparency framework: (i) rulings related to preferential regimes;1 (ii) cross-border unilateral APAs and any other cross-border unilateral tax rulings (such as an AR) covering transfer pricing or the application of transfer pricing principles; (iii) permanent establishment rulings; and (iv) conduit rulings. The IRD is responsible for issuing rulings. The Tax Treaty Section is responsible for issuing APAs and the Profits Tax Unit and the Commissioner’s Unit are responsible for issuing ARs within the other three categories of tax rulings. The Inland Revenue Department of Hong Kong (“IRD”) may publish some ARs on its website in redacted form.2

Past rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1, I.4.2.2)

500.  For Hong Kong, past rulings are any tax rulings within scope that are issued either: (i) on or after 1 January 2015 but before 1 April 2017; or (ii) on or after 1 January 2012 but before 1 January 2015, provided they were still in effect as at 1 January 2015.

501.  A dedicated APA register and AR register are maintained to record the details of the rulings issued, including the category and a brief description of the case, as well as the date of issue and duration of the APA/AR issued. Such details will be entered into the registers in the course of processing the APA/AR. The registers contain the details of all rulings issued since the introduction of the statutory AR regime (1998) and the administrative APA regime (2012).

502.  Officers in the Tax Treaty Section were responsible for identifying past rulings, by consulting the details in the APA register and the AR register. In addition, the paper files of the identified cases were manually reviewed to verify whether the rulings fell within the past ruling period. One ruling was identified to be within the scope of the transparency framework during this review process.

503.  In order to identify potential exchange jurisdictions with respect to the past ruling, the “best efforts approach” was used. The officers first examined the paper file of the relevant AR case, the tax file of the taxpayer and the annual report of the taxpayer’s ultimate parent entity available from the internet to identify the relevant related parties and their jurisdictions of tax residence. All information on potential exchange jurisdictions was identified.

Future rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1)

504.  For Hong Kong, future rulings are any tax rulings within scope that are issued on or after 1 April 2017.

505.  The rulings are identified at the moment that applications for APAs/ARs are received from the taxpayer.

506.  With respect to ARs, applicants are now required to state whether the requested ARs fall within the four categories in the scope of the transparency framework, and if so, to which categories the ARs belong. This information will be registered in the AR register and updated in the course of processing the ARs after verification by senior officers. For controlling purposes, a monthly report will be generated from the AR register to identify all the issued ARs which are not classified as Action 5 rulings. If they appear to fall within the scope, the AR register will be amended.

507.  In order to identify potential exchange jurisdictions, the taxpayer is required to provide this information in the AR application. This information is verified by senior officers by checking the supporting documents, and consulting the profits tax file of the taxpayer and the annual report of the taxpayer’s ultimate parent entity available from internet. Upon the finalisation of the AR, the case officer is required to double check the available information to ensure that all relevant related parties and their jurisdictions of residence are correctly identified.

508.  In the year of review, Hong Kong only considered applications for unilateral APAs in exceptional circumstances and no such APA was issued. The information gathering process for future APA rulings was the same as for past APA rulings. Following the enactment of the Inland Revenue (Amendment) (No. 6) Ordinance 2018 on 13 July 2018, Hong Kong’s APA regime has been codified and applications for unilateral APAs will generally be considered. The information gathering process for APA applications has now been revised along the same line as the amended process for ARs as described in the previous paragraphs.

Review and supervision mechanism (ToR I.4.3)

509.  The IRD has issued internal guidance to explain the five categories of Action 5 rulings and the requirement to exchange such rulings spontaneously with the jurisdictions in which the related parties are resident. In addition, training has been held for relevant AR and APA officers. Taxpayers have been informed of the need for exchanging information on ARs through information included on the amended AR application form. The APA application form will be amended accordingly.

Conclusion on section A

510.  Hong Kong has met all of the ToR for the information gathering process and no recommendations are made. Hong Kong is encouraged to continue its work on revising the APA application procedure in order to identify the relevant information with respect to future APAs.

B. The exchange of information

Legal basis for spontaneous exchange of information (ToR II.5.1, II.5.2)

511.  Hong Kong has the necessary domestic legal basis to exchange information spontaneously. Hong Kong notes that there are no legal or practical impediments that prevent the spontaneous exchange of information on rulings as contemplated in the Action 5 minimum standard.

512.  Hong Kong is party to international agreements permitting spontaneous exchange of information, including double tax agreements in force with 29 jurisdictions.3

513.  In addition, the Inland Revenue (Amendment) Ordinance 2018 was enacted to empower the Chief Executive-in-Council (“CE-in-C”) to make an order for giving effect to multilateral tax arrangements in Hong Kong. By a declaration deposited with the OECD on 29 May 2018, China extended the application of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol (OECD/Council of Europe, 2011) (“the Convention”) to Hong Kong. The order made by the CE-in-C for giving effect to the Convention came into operation on 13 July 2018, and the Convention entered into force in Hong Kong on 1 September 2018.

Completion and exchange of templates (ToR II.5.3, II.5.4, II.5.5, II.5.6, II.5.7)

514.  With respect to the one past ruling, the Tax Treaty Section completed the relevant template, which was in the form of Annex C of the 2015 Action 5 Report (OECD, 2015). Internal guidance has been issued by the IRD to explain the information required in the template. The officer in charge of the AR or APA case is required to follow the internal FHTP suggested guidance by including a description of the relevant transaction or activity covered by the AR/APA, the agreed tax treatment and any other relevant information. This template was submitted for review and approval by the Deputy Commissioner of the IRD (who is also the Competent Authority). The information was exchanged with the relevant jurisdiction in December 2017.

515.  For future rulings, the AR and APA officers are required to complete the relevant templates and send them to the Tax Treaty Section immediately after issuing the rulings. The template is currently in Word format but based on the OECD XML Schema and User Guide (OECD, 2017b). The head of the Tax Treaty Section reviews if the relevant templates are accurate and complete before submitting them to the Competent Authority for exchange within two months of issue of the ruling. In addition there is a separate register, the “Outgoing Spontaneous Exchange of Information Register”, which will generate a monthly report showing the position of all Action 5 rulings issued. The cases with respect to which exchange of relevant templates have not been conducted within two months after the date of issue of the rulings will be referred to the head of the Tax Treaty Section. This register will also be reconciled with the APA register and the AR register to ensure that all Action 5 rulings issued are monitored.

516.  The IRD is currently developing a computer program to enable officers to convert the relevant templates into XML schema format (in accordance with the OECD XML Schema). All validation elements that are required in the OECD XML Schema and User Guide (OECD, 2017) will be incorporated in this computer program.

517.  For the year in review, the timeliness of exchanges is as follows:

 

Past rulings in the scope of the transparency framework	Number of exchanges transmitted by 31 December 2017	Delayed exchanges
		Number of exchanges not transmitted by 31 December 2017	Reasons for the delays	Any other comments
	1	0	N/A	N/A
Future rulings in the scope of the transparency framework	Number of exchanges transmitted within three months of the information becoming available to the competent authority or immediately after legal impediments have been lifted	Delayed exchanges
		Number of exchanges transmitted later than three months of the information on rulings becoming available to the competent authority	Reasons for the delays	Any other comments
	0	0	N/A
Total	1	0

 

Follow up requests received for exchange of the ruling	Number	Average time to provide response	Number of requests not answered
	0	N/A	N/A

Conclusion on section B

518.  Hong Kong has the necessary legal framework and administrative process in place for exchanging information on rulings. Hong Kong has timely exchanged the information on the ruling within scope of the transparency framework. Hong Kong has met all of the ToR for the exchange of information process and no recommendations are made.

C. Statistics (ToR IV)

519.  The statistics for the year in review are as follows:

 

Category of ruling	Number of exchanges	Jurisdictions exchanged with
Rulings related to preferential regimes	Included in de minimis	N/A
Cross-border unilateral advance pricing agreements (APAs) and any other cross-border unilateral tax rulings (such as an advance tax ruling) covering transfer pricing or the application of transfer pricing principles	0	N/A
Cross-border rulings providing for a unilateral downward adjustment to the taxpayer’s taxable profits that is not directly reflected in the taxpayer’s financial / commercial accounts	N/A	N/A
Permanent establishment rulings	0	N/A
Related party conduit rulings	0	N/A
De minimis rule	1	N/A
IP regimes: total exchanges on taxpayers benefitting from the third category of IP assets, new entrants benefitting from grandfathered IP regimes; and taxpayers making use of the option to treat the nexus ratio as a rebuttable presumption	N/A	N/A
Total	1

D. Matters related to intellectual property regimes (ToR I.4.1.3)

520.  Hong Kong does not offer an intellectual property regime for which transparency requirements under the Action 5 Report (OECD, 2015) were imposed.

Summary of recommendations on implementation of the transparency framework

 

Aspect of implementation of the transparency framework that should be improved	Recommendation for improvement
	No recommendations are made.

References

OECD (2017a), BEPS Action 5 on Harmful Tax Practices – Terms of Reference and Methodology for the Conduct of the Peer Reviews of the Action 5 Transparency Framework, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris. www.oecd.org/tax/beps/beps-action-5-harmful-tax-practices-peer-review-transparencyframework.pdf.

OECD (2017b), Country-by-Country Reporting XML Schema: User Guide for Tax Administrations, OECD, Paris. www.oecd.org/tax/country-by-country-reporting-xmlschema-user-guide-for-tax-administrations.pdf.

OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. https://doi.org/10.1787/9789264241190-en.

OECD/Council of Europe (2011), The Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264115606-en.

Notes

← 1.  With respect to the following preferential regimes: 1) Profits tax concession for corporate treasury centres, 2) Profits tax concession for professional reinsurers, 3) Profits tax concession for captive insurers, 4) Profits tax exemptions for ship operators and 5) Profits tax concessions for aircraft lessors and aircraft leasing managers.

← 2.  www.ird.gov.hk/eng/ppr/arc.htm (accessed 19 November 2018).

← 3.  Hong Kong has bilateral agreements with Austria, Bailiwick of Guernsey, Belarus, Belgium, Canada, China (People’s Republic of), France, Hungary, Indonesia, Ireland, Italy, Japan, Jersey, Korea, Latvia, Malta, Mexico, Netherlands, Pakistan, Portugal, Qatar, Romania, South Africa, Spain, Switzerland, Thailand, United Arab Emirates, United Kingdom and Viet Nam.