Master File, Local File and Country by Country Reporting
Hong Kong's Legislative Council on 4 July 2018 passed the Inland Revenue (Amendment) (No. 6) Bill 2017 ("Bill"), which became effective on 13 July 2018 following the signature of the Chief Executive and publication in the Gazette. The Amendment Bill No. 6 adopted the three-tiered documentation structure, comprising a Master File, Local File and the Country by Country ("CbC") Reporting, recommended by the Organization for Economic Co-operation and Development ("OECD").
Master File and Local File
Each Hong Kong taxpayer is required to prepare and keep on record a Master File and a Local File for each accounting period beginning on or after 1 April 2018 unless exemption applies.
A taxpayer will be exempt from the Master File and Local File requirements if he or she satisfies either one of the following exemptions:
|Exemption based on the size of the business|
|Total Annual Revenue||< = HK$ 400 million||Any taxpayer meeting any two of the three conditions is not required to prepare the Master File or the Local File.|
|Total Assets||< = HK$ 300 million|
|Average Amount of Employees||< = 100 employees|
|Exemption based on the total amount of transactions under the related parties's control|
|Transaction of Properties (Financial and Intangible Assets excluded)||< = HK$ 220 million||
If the related parties’ amount of transactions is below the threshold for the relevant accounting period, a Local File will not be required for this category of transactions.
If a taxpayer does not need to prepare a Local File for all of the specified categories of the related parties’ transactions, the taxpayer is not required to prepare any Master File as well.
|Transaction of Financial / Intangible Assets||< = HK$ 110 million|
|Other Transaction||< = HK$ 44 million|
Penalties of Failing to Prepare the Master File and the Local File in Accordance with the Bill
Any taxpayer who fails to prepare a Master File and a Local File in accordance with the Bill without any reasonable excuse is liable to a Level-5 Fine (HK$ 50,000) and may be ordered by the court to prepare the files within a specified time. Failure to comply with that order carries a Level-6 Fine (HK$ 100,000) on conviction.
Country by Country Reporting (CbCR)
CbC Reporting is a minimum standard formulated by OECD under Action 13 of the Base Erosion and Profit Shifting Package.
Notification of CbC Reporting
If a Multinational Enterprise (MNE) Group is a Reportable Group, its every Hong Kong Entity is required to file a written notice of CbC Reporting to the Inland Revenue Department within 3 months after the end of the relevant accounting period to identify the reportable Ultimate Parent Entity (UPE) or Constituent Entity (CE), unless:
- The entity is not the group’s UPE or Surrogate Parent Entity (SPE) or a reportable Hong Kong Entity; and
- Another Hong Kong Entity has already filed such a written notice.
CbC Report Filing
A MNE Group is also a Reportable Group for an accounting period if it had a total consolidated group revenue of at least the following threshold amount for immediate preceding accounting period:
- For a group with its UPE resident in Hong Kong, the threshold is HK$ 6.8 billion (or EUR 750 million)
- For a group with constituent entities or business operations in at least two jurisdictions, the threshold is the same as the above.
Automatic Exchange of CbC Reports
The Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Multilateral Convention) will be the main platform for Hong Kong to exchange CbC Reports with other jurisdictions. So far, Hong Kong has made such bilateral arrangements with France, Ireland, South Africa and United Kingdom.
Penalties of Failing to File the CbC Report in Accordance with the Bill
Penalties are provided in respect of matters such as failing to complete CbC Reporting or to file a notice without any reasonable excuse, providing misleading, false or inaccurate information or omitting information in the CbC Report. Depending on the seriousness of the case, the penalty is set at a fine of HK$ 10,000 with imprisonment for 6 months (on summary conviction) or a fine of HK$ 50,000 with imprisonment for 3 years (on conviction on indictment).
Support and Assistances
Multinational corporations or any enterprises with cross border activities should review their existing operating and tax / transfer pricing structures to evaluate their ability to meet these new regulations mentioned as above. Our experienced tax specialists can advise clients on tax compliance services including transfer pricing consulting in Hong Kong and China, and we will be glad to assist you with the notification of CbC reporting and provide other relevant services.
Should you have any enquires about Master File, Local File and Country by Country Reporting, please complete the form below and we will reply to you soon.