Country-by-Country (CbC) Reporting

The term "resident for tax purposes" is defined under section 50AAC of the Inland Revenue Ordinance (IRO).  According to the definition, an UPE is a tax resident in –

If Hong Kong and that other jurisdiction have a DTA, the dual residence issue should be dealt with pursuant to the tie-breaker rules under the DTA.  Otherwise, the UPE will have to comply with its CbC reporting obligation in both jurisdictions.

While there is no prescribed procedure for the appointment of SPE, as a matter of good practice, the SPE is expected to have written authorization from the group's UPE.  The SPE may be required to submit such authorization to substantiate its capacity of SPE if necessary.

The Department's interpretation is that the condition precedent for Hong Kong to require local filing under section 58I(1)(b) of the IRO is met in relation to a reportable group for an accounting period if:
 

A Hong Kong entity of a reportable group with the UPE resident in such a jurisdiction is not subject to local filing because the DTA or TIEA is not an international agreement which allows automatic exchange of information.  Therefore, the condition precedent for local filing under section 58I(1)(b) is not satisfied.

For the purposes of CbC reporting, a reportable group refers to an MNE group with an UPE of which the controlling interest is not owned by another constituent entity.  Section 58F(1) requires a Hong Kong entity of a reportable group that is not the UPE to file a CbC return if a condition precedent for Hong Kong to require local filing is met in relation to the group.  A sub-group of an MNE group is not a reportable group.  A Hong Kong entity is therefore not allowed to file a CbC return only in respect of a sub-group to which it belongs.  In any case, CbC reporting calls for coordination among an MNE group.  The group's UPE should ensure the availability of all necessary information to other constituent entities so that other constituent entities can comply with the reporting requirements in their jurisdictions of tax residence.

The MNE group is required to file a CbC return for the current accounting period as the requirement to file CbC return is based on whether the group's total consolidated group revenue exceeded the specified threshold amount for the preceding accounting period.

In determining whether the total consolidated group revenue of an MNE Group exceeds the specified threshold amount, all of the revenue that is (or would be) reflected in the consolidated financial statements should be taken into account.  Extraordinary income and gains from investment activities should be considered if those items are presented in the consolidated financial statements under applicable accounting rules.

It is not uncommon that an MNE group has some entities which the group does not exercise direct or indirect control.  This may arise where the group jointly controls the entities with other investors (e.g. joint ventures), or where the group only controls between 20% and 50% of the entities' interest and there is no joint control (e.g. associates).

Depending on the applicable accounting rules, such an entity may not be required to be consolidated into the group's financial statements.  Instead, only the group's share of profit or loss in the entity will be included in a single line item of the group's consolidated income statement.  For the purpose of applying the specified threshold amount, the share of profits so accounted for would not form part of the consolidated group revenue.

However, if the applicable accounting rules require consolidation or pro rata consolidation of the entity into the group's consolidated financial statements, the full amount or a pro rata share of the entity's total revenue (as the case may be) should be taken into account for the purpose of applying the specified threshold amount.

The MNE group should first compute the pro rata share of the specified threshold amount that would correspond to the short accounting period.  Such amount will then be compared with the group's total consolidated group revenue to determine whether the specified threshold amount is exceeded.

Under section 58H(1) of the IRO, a Hong Kong entity is required to file a notification for an accounting period if the group to which the entity belongs is a reportable group (i.e. the group has a total consolidated group revenue of at least the specified threshold amount) for that accounting period.  This obligation applies on a year-by-year basis.

The IRO does not allow a Hong Kong entity (Notifying Entity) to file a notification for CbC reporting in respect of a sub-group.  The Notifying Entity must file the notification in respect of the whole MNE group, comprising the details of all Hong Kong entities of the group.  The group's UPE should ensure that the Notifying Entity has the necessary information to comply with the notification requirements in Hong Kong.

Section 58F requires a Hong Kong entity of a reportable group that is not the group's UPE to file a CbC return in respect of an accounting period by the filing deadline if, among others, a condition precedent for Hong Kong to require local filing is met within the meaning of section 58I(1)(a) (i.e. the UPE is not required to file a CbC report in its jurisdiction of tax residence), unless the SPE-filing-elsewhere exception or SPE-filing-in-HK exception applies within the meaning of section 58I(2).  Whether the non-Hong Kong UPE or SPE is required to file a CbC report in its jurisdiction of tax residence cannot be ascertained if it has not notified the tax authority of its jurisdiction of tax residence of its CbC reporting obligation.  In such circumstances, it is reasonable to presume that the condition precedent for Hong Kong to require local filing under section 58I(1)(a) is met or the SPE-filing-elsewhere exception under section 58I(2)(a) does not apply.

In such circumstances, the reporting entity can use a function under "File Return" on the CbC Reporting Portal to submit a request for not filing the CbC return with a reason provided.  If accepted, the Department will send an e-message to the reporting entity, informing it that it is not required to file the CbC return.

In the context of CbC reporting, the term "service provider" refers to a person engaged to carry out the CbC reporting obligations of a reporting entity under section 58M(1) of the IRO, whilst the term "authorized representative" means a person authorized to represent the reporting entity when communicating with the Department in relation to CbC reporting.  The service provider and the authorized representative may be different persons.  In such a case, the reporting entity is required to inform the Department of the details of its authorized representative, or else the Department will only communicate with the service provider in relation to the CbC reporting matters of the entity.

The persons who can operate the CbC Reporting Account of a reporting entity under the CbC Reporting Portal are as follows:

The information about the person acting for or responsible for the management of a non-corporate reporting entity is required because section 58N(1) of the IRO provides that, in the case of a non-corporate reporting entity, the CbC reporting obligations apply to a person who acts for the entity or is responsible for the management of the entity.  For the purposes of enforcement, the relevant person of the entity has to be identified.

There are some occasions where more than one reporting entity are required to comply with the CbC reporting requirements.  For example, section 58F(1) provides that each Hong Kong entity of a reportable group that is not the group's UPE must file a CbC return for an accounting period if a condition precedent for Hong Kong to require local filing is met in relation to the group under section 58I(1) for that accounting period.  Also, section 58H(1) provides that each Hong Kong entity of a reportable group is required to file a CbC reporting notification.  Under these circumstances and subject to any applicable exemption, each Hong Kong entity falls within the definition of "reporting entity" under section 58J of the IRO.  If the relevant filing or notification obligation is not complied with, each reporting entity can be liable to the penalty provided under section 80G of the IRO.

Section 80G(6) or (9)(a) provides that a reporting entity commits an offence if the entity files or causes to file a CbC reporting notification which is misleading, false or inaccurate in a material particular knowingly, recklessly, without reasonable ground or with intent to defraud.  Whether or not a reporting entity commits the offence depends on the facts of the case.  Any timely action taken by the reporting entity to rectify the irregularity would be a factor for deciding the type of penal action, if any, that should be taken.

Under section 58H(1), each Hong Kong entity of a reportable group is required to file a CbC reporting notification within 3 months after the end of the accounting period concerned.  Section 58H(3) provides that a Hong Kong entity is not required to comply with section 58H(1) if another Hong Kong entity which satisfies the specified conditions has filed the notification by the notification deadline.  If the Designated Entity fails to file the notification, the Designated Entity is liable to a penalty for its non-compliance with section 58H(1).  Each of the other Hong Kong entities is also liable to a penalty as the exemption under section 58H(3) does not apply.  If the Designated Entity has filed the notification but the notification is incorrect, then the Designated Entity is liable to a penalty for its filing of an incorrect notification.