Author: Dominik Stuiber
The BEPS Project is the brainchild of the Organisation for Economic Co-operation and Development (The OECD) and the G20 and is a series of 15 Action Plans aimed at preventing tax avoidance caused by base erosion and profit shifting by multinationals.
insight into the tax planning strategies of multi-national corporations was
given through the publication of the Luxembourg Leaks (LuxLeaks) documents. The
LuxLeaks was followed by public and political outcry over the “unfair” methods,
structures and arrangements MNCs such as Amazon, Apple, AXA, Burberry, Pepsi,
and many others establish to lower their tax dues in high tax jurisdictions and
instead move profits to places with significantly lower, or even no tax.
put, companies have long exploited transfer pricing to avoid tax; with Hong
Kong being at the receiving end of aggressive transfer pricing strategies due
to its simple and low tax regime.
the urgent need to tackle Base Erosion and Profit Shifting (BEPS) practiced by
some multinational enterprises (MNEs) through aggressive tax planning and
artificially shifting profits to low or no-tax regions, countries and
jurisdictions worldwide including Hong Kong have committed to join the
inclusive framework on BEPS and adhere to the new global standards.
BEPS framework is built around four minimum standards:
harmful tax practices (Action 5)
treaty abuse (Action 6)
country-by-country reporting requirements (Action 13)
cross-border dispute resolution mechanism (Action 14)
7th June 2017, Hong Kong joined the OECD Multilateral Convention to
Implement Tax Treaty Related Measures to Prevent BEPS (Action 15), implementing
minimum standard Actions 6 and 14, as well as Actions 2 (hybrid mismatch arrangements)
and 7 (definition of permanent establishment).
Hong Kong’s legislation to accommodate BEPS will require amendments to transfer
pricing regulations (Actions 8-10). With no statutory transfer pricing
regulations in place, Hong Kong’s IRD relies on general anti-abuse provisions
of the Inland Revenue Ordinance (IRO) and its Departmental Interpretation and
Practice Notes (DIPN). Thus, codifying transfer pricing rules in law will allow
for a wider application beyond the general anti-abuse provisions.
BEPS is understood to: ‘undermine the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level. Moreover, when taxpayers see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all tax payers.’