July 2018 / Hong Kong

On 29 June 2018, Inland Revenue (Amendment) (No. 5) Ordinance 2018 was gazetted. The Ordinance enables Hong Kong to expand the scope of profits tax deductions for capital expenditure incurred by enterprises for the purchase of intellectual property (IP) rights from five types to eight with effect from the year of tax assessment 2018/19. With the expansion in scope of tax deductions provided therein, the eight types of IP rights eligible for profits tax deductions are:

• patents;
• know-how;
• copyrights;
• registered designs;
• registered trademarks;
• rights in layout design (topography) of integrated circuits;
• rights in plant varieties; and
• rights in performances.

The Ordinance also expands the scope of tax deductions originally provided for registration expenses related to trademarks, designs and patents to include plant variety rights.

The Inland Revenue (Convention on Mutual Administrative Assistance in Tax Matters) Order (the Order) was gazetted and came into operation on 13 July 2018. The Convention on Mutual Administrative Assistance in Tax Matters (the Convention) will enter into force in Hong Kong on 1 September 2018 and will allow Hong Kong to effectively implement the automatic exchange of financial account information in tax matters (AEOI) and the Base Erosion and Profit Shifting (BEPS) package promulgated by the OECD. Hong Kong will also follow the Convention to take forward the automatic exchange of country-by-country reports and spontaneous exchange of information on tax rulings under the BEPS package. Pursuant to the reservations made under the Convention, Hong Kong will not render assistance to other tax authorities in terms of recovery of tax claims or fines or the service of documents.

On 13 July 2018, the Inland Revenue (Amendment) (No. 6) Ordinance 2018 was gazetted. The Amendment Ordinance primarily implements the minimum standards of the Base Erosion and Profit Shifting (BEPS) package promulgated by the OECD and codifies the transfer pricing principles into the Inland Revenue Ordinance (Cap. 112) (IRO). Under the Amendment Ordinance, the ultimate parent entity of a multinational enterprise (MNE) group (which is tax resident in Hong Kong) is required to file country-by-country (CbC) reports to the Inland Revenue Department (IRD) for exchange with other relevant jurisdictions if the annual consolidated group revenue is not less than HKD 6.8 billion. The Amendment Ordinance also requires taxpayers to prepare master files and local files as part of the transfer pricing documentation, subject to certain exemptions. In addition, the Amendment Ordinance gives a statutory basis to the cross-border dispute resolution mechanism (i.e. mutual agreement procedure and arbitration) and advance pricing arrangement, which were previously implemented based on IRD's administrative rules. The key elements of the Amendment Ordinance are summarized below:

Key Element	Effective Date
enhancements to double taxation relief provisions	apply to tax payable for a year of assessment beginning on or after 1 April 2018
transfer pricing rules and related provisions	– apply to a year of assessment beginning on or after 1 April 2018 for arm's length principle, advance pricing arrangement and changes in trading stock; – apply to a year of assessment beginning on or 1 April 2019 for separate enterprise principle and taxation of income from intellectual property accrued to non-Hong Kong resident associates; and – grandfathering of transactions effected or income accrued before 13 July 2018.
TP documentation requirements relating to master file, local file and CbC reporting	– apply to an accounting period beginning on or after 1 January 2018 for CbC reporting; – apply to an accounting period beginning on or after 1 April 2018 for master file and local file; and – voluntary filing of CbC reporting allowed for an accounting period beginning in 2016 or 2017.
amendments to preferential regimes, including extension of tax concession to domestic transactions and prescription of thresholds for substantial activities requirements	– apply to tax payable for a year of assessment beginning on or after 1 April 2018; and – threshold requirements will be prescribed after consulting the relevant stakeholders.

The IRD will promulgate guidance to facilitate taxpayer's understanding of the requirements under the Amendment Ordinance in due course. Further developments will be reported in due course.