International tax developments continue to evolve alongside new business models due to the continued globalization of the world economy over past 20 years. The blurring of boundaries and borders has been intensified by the fast-paced developments in the digital economy over the past 10 years. This stresses traditional international tax models and treaties.
Due to the fact that the traditional tax systems were not developed to deal with the business models of the modern economy, international organizations have developed guidance to provide a level playing field in international tax. The Organization for Economic Cooperation and Development (OECD) and other international organizations, like the United Nations and the European Union, have developed and introduced new guidance and international tax models, and it is becoming more difficult for corporations that have cross-border transactions to obtain tax benefits by utilizing loopholes in the tax systems in different jurisdictions. Increased transparency as a result of exchange of information among the different tax jurisdictions also makes it more challenging for corporations to manage the potential tax risks – and costly when it comes to tax litigation.
The OECD Base Erosion and Profit Shifting (BEPS) inclusive framework, an international tax model, introduced new transfer pricing (TP) rules. Many tax jurisdictions, including Hong Kong, have codified the BEPS TP rules into their local tax legislation. While many of us had just got ourselves familiar with these TP rules, the Hong Kong government is now busy preparing for the impact of the next phase of BEPS, the BEPS 2.0 initiative.
The report on the long-term and consensus-based solution under the BEPS 2.0 initiative will be released in a few months time. The Global Anti-Base Erosion Proposal (GloBE), under Pillar Two of the BEPS 2.0 initiative, will set a minimum effective tax rate on profits of multinational corporations. The rules under GloBE may have profound impacts on the Hong Kong tax system.
About the conference
The Institute’s Taxation Faculty will host the Annual Taxation Conference 2020 on 18 July as an e-conference, covering some recent developments in the international taxation landscape.
During the conference, I will moderate a panel using a hypothetical merger and acquisition (M&A) case as a base for the discussion. Tax can be a major consideration for an M&A transaction, and major unsettled tax disputes of the targets can be deal-breakers for transactions. The panellists will discuss the tax implications in the following areas through a case study:
- Indirect transfers;
- Appropriate pricing of interest rates in intercompany financing activities in multiple jurisdictions;
- Interest deduction issues on cross border inter-company financing activities;
- Tax issues for using pure holding companies, e.g. entitlement of tax treaty benefits, withholding tax on dividend payments; and
- Would it be better off not using the pure holding companies in the group structure?
As well as this panel, there will be presentations on the latest changes in the Hong Kong domestic tax legislation and the new tax practices of the Inland Revenue Department (IRD) from Brian Chiu, Deputy Commissioner (Technical) of the IRD, and Michael Olesnicky, Senior Consultant from Baker & McKenzie, sharing the latest decisions from court cases and the Board of Review. There will also be another roundtable discussion on the challenges Hong Kong faces from the BEPS 2.0 initiative and COVID-19.
If you are keen to learn the recent domestic and international tax developments, you cannot afford to miss the Annual Taxation Conference 2020. Register online for the conference.
Sarah Chan is Deputy Chair of the Institute’s Taxation Faculty Executive Committee, Member of the Taxation Faculty China Tax Sub-committee, and Partner, Tax and Business Advisory Services, Deloitte China. She has more than 25 years of tax and business advisory experience. Having previously worked in China and the Unites States, Chan has extensive experience in advising multinational corporations on structuring transactions, business reorganization, operational re-modelling, cross-border financing and exploring investment options and exit plans.