Hong Kong addresses international double taxation through the network of Comprehensive Double Taxation Agreements (DTAs), which allocate taxing rights to prevent income from being taxed twice.
Beside the DTAs, Hong Kong has a territorial tax system (only taxing income sourced in Hong Kong), foreign-sourced income isn’t taxed in Hong Kong, if another country also doesn’t tax that income (maybe due to an exemption or low-tax regime), then that income isn’t taxed anywhere. Unlike double taxation, double non-taxation occurs when income escapes taxation in both jurisdictions due to mismatched tax rules or treaty gaps. Examples include “treaty shopping,” where businesses exploit loopholes to achieve unintended tax-free status.
Since 2015, the Organisation for Economic Co-operation and Development (OECD) and G20 have published an international framework project, the Base Erosion and Profit Shifting (BEPS), strategies that exploit gaps and mismatches in tax rules to shift profits to low or no-tax locations.
BEPS Action 2 deals with hybrid mismatch arrangements that result in double non-taxation. Hong Kong has introduced legislation to tackle hybrid mismatches, aligning with BEPS recommendations. Combating cross-border tax evasion and double non-taxation demands sustained global cooperation, robust legal frameworks, and technological innovation.
Double non-taxation
Double non-taxation arises from gaps in tax systems, such as mismatches in residency rules, hybrid instruments, or territorial tax regimes.
How BEPS Relates to Double Non-Taxation
Double non-taxation occurs when income is neither taxed by the resident state nor by the source state due to discrepancies or mismatches between the tax systems and treaties of the two states involved. This is precisely the type of loophole that BEPS projects target, as it allows corporations to significantly lower their effective tax rate, which in turn affects global tax revenues and the integrity of tax systems.
Conclusion
BEPS compliance requires a proactive, holistic approach to align tax strategies with economic substance and transparency. Companies must prioritize robust documentation, technology-driven reporting, and ongoing risk assessments to navigate the evolving global tax landscape. By doing so, they mitigate risks, build trust with stakeholders, and contribute to a fairer international tax system.
Stay ahead by embedding BEPS principles into your corporate governance and collaborating with tax advisors to adapt to new requirements.
More information link:
OECD
https://www.oecd.org/en/topics/global-minimum-tax.html
Inland Revenue Ordinance