The Country-by-Country Report, or CbC report, is a crucial aspect of international tax compliance, designed to provide transparency and prevent profit shifting among multinational corporations. In Hong Kong, this report is mandated by the Organization for Economic Cooperation and Development (OECD) as part of Action 13 within the Base Erosion and Profit Shifting (BEPS) package.
Let's delve into what the CbC report entails, its prerequisites, and the regulatory framework in Hong Kong.
The Essentials of CbC Reporting
The CbC report is applied during an accounting period that satisfies two key conditions:
- The group's consolidated turnover for the previous accounting period must be at least 750 million EUR or its equivalent in Hong Kong Dollars (HK$), which is approximately 6.8 billion HK$.
- The group must have constituent entities or activities in two or more tax jurisdictions.
This report requires consolidated information on a per-tax-jurisdiction basis. It covers various critical aspects, including the global allocation of income, taxes paid, and specific indicators related to the location of economic activity among the tax jurisdictions in which the group operates.
CbC Reporting in Hong Kong
Hong Kong's regulatory framework for CbC reporting is established under the Inland Revenue (Amendment) (No. 6) Bill 2017. In the context of a Reportable Group, the primary responsibility for filing a CbC Return falls on the ultimate parent entity (UPE) that is a resident in Hong Kong (HK UPE). This obligation applies to each accounting period beginning on or after January 1, 2018.
However, in cases where the UPE is not a resident of Hong Kong, a Hong Kong Entity within a Reportable Group has a secondary obligation to file a CbC Return under specific conditions:
- The UPE is not obligated to file a CbC Report in its tax jurisdiction.
- The tax jurisdiction has an international agreement with Hong Kong for automatic exchange of tax information, but no exchange arrangement exists between the jurisdiction and Hong Kong for CbC Reports by the filing deadline.
- There has been a systemic failure by the jurisdiction to exchange CbC Reports, as notified to the Hong Kong Entity by the Commissioner.
Notably, if one of these conditions is met, the Hong Kong Entity is exempt from filing a CbC Return if:
- Another Hong Kong Entity within the Reportable Group files a CbC Return for the relevant accounting period.
- The Reportable Group designates a constituent entity as its surrogate parent entity (SPE) to file the CbC Report on behalf of the Group, and the SPE submits the CbC Report in Hong Kong or in a jurisdiction with an existing exchange arrangement with Hong Kong.
Key Filing Deadlines and Penalties
Every Hong Kong Entity must provide a notification containing relevant information within three months after the end of the applicable accounting period. The deadline for submitting a CbC Return is 12 months after the close of the relevant accounting period or as specified in the assessor's notice, whichever is earlier.
Service providers (SPs) can be engaged to file CbC Returns or related notifications, but it's crucial to ensure compliance, as penalties are enforced for matters such as failure to file CbC Returns and providing misleading, false, or inaccurate information. Some of these penalty provisions extend to service providers as well.
In Conclusion
The Country-by-Country Report serves as a vital tool for ensuring tax transparency and equity among multinational corporations. In Hong Kong, compliance with CbC reporting requirements is a crucial aspect of international tax regulations. It's often intertwined with transfer pricing studies, emphasizing the importance of accuracy and timeliness in this process.
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