CbCR: Surviving the Hong Kong CbCR Rules – Tax Tips (20)

Manage Your CbCR

If you work in a Hong Kong subsidiary of a large Multinational Enterprise (MNE) Group and you think Country-by-Country Reporting (CbCR) has nothing to do with you, think again.

Your employer could be facing a penalty of HK$50,000 (US$6,400) on each Hong Kong entity for failing to file CbCR notification with the Hong Kong Inland Revenue Department (“IRD”), the first deadline falls on 31 March 2019 (the IRD announced on 21 March 2019 that the notification deadline for qualifying entities is extended by 45 days to 15 May 2019). Failing to file the CbCR will also attract the same level of penalties. In addition, you may be under a statutory obligation to keep the underlying records of the CbCR, which includes detailed information of the global operations of the Group, for 6 years or you may once again get hit with the HK$50,000 penalty. What is more, the Hong Kong CbCR Rules could impact your Group’s relationship with business partners and potential investors.

The CbCR rules are contained in Part 9A Division 3 of the Inland Revenue Ordinance (“IRO”) introduced under Inland Revenue (Amendment) (No 6) Ordinance 2018, which also included the other transfer pricing documentation requirements, namely the master file and local file. This Tax Tips focuses on the CbCR, which many in the community are not aware of the statutory requirements, the additional hurdles introduced for compliance, the practical issues of preparing the CbCR, and the importance of project management. The Hong Kong CbCR rules are, unfortunately, very tough.

Worried? Read on.

The Basics about CbCR

The CbCR was introduced under the Final Report on Action 13 of the OECD Base Erosion and Profit Shifting (“BEPS”) Project (“Action 13”) as a tool for high-level transfer pricing risk assessment. It may be used by tax administrations in evaluating other BEPS related risks and where appropriate for economic and statistical analysis.

Action 13 – Who needs to prepare CbCR and where to file

Normally it should be relatively easy to determine if an entity is required to file a tax return or not. Not the case for CbCR. The general rule under Action 13 is that if an MNE Group’s annual consolidated group revenue in the immediately preceding fiscal year (for example, for the year ended 31 December 2017) exceeds EUR750 million, then Ultimate Parent Entity (“UPE”) of the group will need to prepare CbCR for the following year (the year ended 31 December 2018 in the example), and file it with the UPE’s tax office which is due within 12 months after the year-end date (31 December 2019 in the example).

The CbCR submitted will then be automatically exchanged with other jurisdictions (based on an international agreement – the Multilateral Competent Authority Agreement on the Exchange of CbC Reports (the “CbC MCAA”)) that the MNE Group operates in (as indicated on the CbCR) so that there is no need for the UPE to file the report multiple times in different tax jurisdictions. However, there are a variety of situations for CbCR exchanges. The United States, for example, did not sign the document but instead arrange bilateral exchange agreements with other jurisdictions. Some jurisdictions, such as the Cayman Islands and Bermuda, are only doing one-way exchange: sending the CbCR collected to other jurisdictions but is not accepting CbCR (likely because there is no tax there).

The CbCR

The CbCR consists of three tables. Table One requires aggregate tax jurisdiction-wide information relating to the global allocation of the income, the taxes paid, and certain indicators of the location of economic activity among tax jurisdictions in which the MNE Group operates. Below is Table One.

Table 1

Table Two requires a listing of all the Constituent Entities (“CE”) of the MNE Group for which financial information is reported, including the tax jurisdiction of incorporation, where different from tax jurisdiction of residence, as well as the nature of the main business activities carried out by that CE.

Table 2

MNE Groups may use Table Three to provide additional information or explanation that is considered necessary or that would facilitate the understanding of the compulsory information provided in Table One and Two.

Table 3

Simple in Design, Difficult to Comply

After Action 13 was published in 2015, tax jurisdictions around the world have to pass the filing requirements into the local laws before CbCR can be collected. Naturally, some tax jurisdictions (mostly OECD countries) managed to swiftly implement the rules (the first year of filing would be for the year 2016, meaning the financial year that began within the calendar year 2016) but many were late. Hong Kong passed the law in July 2018 and the first year of filing is for the year 2018.

What would happen if the jurisdiction where the UPE is located has not introduced the CbCR laws but in some jurisdictions that the MNE Group operates the CbCR laws have been implemented?

This is where the “fun” is.

Local Filing, Parent Surrogate Filing, Surrogate Parent Filing

The MNE Group has to find out at each location that it operates, what is the status of CbCR implementation, and whether there is a “Local Filing” requirement. Local Filing, in simple terms, refers to the filing requirement imposed on the CE located in the tax jurisdiction to file the Group CbCR when the tax office is not able to obtain the CbCR from the UPE’s tax jurisdiction. In some jurisdictions, Local Filing is needed only upon request (for example, during a tax investigation).

If the UPE is required to file CbCR, it will need to check all the locations where the group operates whether the tax jurisdiction of the local CE is able to obtain the CbCR via an exchange mechanism with the UPE’s tax jurisdiction. If not, the local CE needs to perform Local Filing. In which case, the UPE needs to provide the CbCR to the local CE for filing. Multiple Local Filings may be needed.

If the UPE is not required to file CbCR, the Group is more likely to face multiple filings in different jurisdictions. To help reduce the compliance burden, Action 13 introduced two solutions: Parent Surrogate Filing and Surrogate Parent Filing (there is no typo here, these are two different terms), but it is up to each tax jurisdiction to determine if they allow such filing.

Parent Surrogate Filing refers to a voluntary CbCR filing by the UPE at the UPE’s tax jurisdiction before statutory filing is introduced into law. The tax office will exchange the CbCR obtained with other jurisdictions via automatic exchange or bilateral agreement. Hong Kong is a jurisdiction that accepted Parent Surrogate Filing for years 2016 and 2017 but it is unlikely that this offer has ever been taken up as the exchange network was very limited (thus incapable to avoid multiple Local Filing in other jurisdictions).

Surrogate Parent Filing allows the UPE to appoint a CE in another jurisdiction to be the parent entity for CbCR purposes and file the group’s CbCR with that other jurisdiction as if the CE is the UPE of the Group. This is a more popular solution for avoiding multiple Local Filing because the group can choose a CE in a jurisdiction with the widest automatic-exchange network (for example, the United Kingdom) as the Surrogate Parent Entity (“SPE”). Many Hong Kong groups selected this filing method for the years 2016 and 2017.

The OECD has been keeping track of the CbCR implementation status of different jurisdictions as well as their acceptance of Parent Surrogate and Surrogate Parent Filing. Below is the status as at 10 January 2019 extracted from the OECD website:


Anyone who had the experience of managing the CbCR filing for a reportable MNE Group for years 2016 and 2017 would know how much headache it is to ensure compliance.

Are You Ready for Preparing the CbCR Correctly?

Test your knowledge by answering the following true or false statements:


  1. CEs refer to entities that the UPE owns 50% or more.
  2. Representative Offices or Branches with separate accounts are themselves CEs.
  3. “Revenue” includes capital gains.
  4. Related parties transactions can be eliminated for reporting.
  5. Income tax paid does not include foreign taxes.
  6. A CE that left the group during the year (e.g. disposed of) can be excluded from the CbCR for that year.
  7. The number of employees includes independent contractors.
  8. The Tax Identification Numbers (taxpayer file number) and addresses of CEs are not required for CbCR filing.

Answers are at the end of this article.

The OECD Action 13, the Guidance on the Implementation of CbCR (the “CbCR Guidelines”, issued by the OECD and last updated in September 2018) and the CbCR: Handbook on Effective Implementation (the “CbCR Handbook” issued by the OECD in 2017) provide some guidance on the definition of various terms and how to deal with different situations. However, it is far from comprehensive. Groups need to decide in situations specific to them the position to take in the CbCR and ensure that all CEs take the same position. It is thus important that the MNE Group studies the OECD documents and guidance issued by tax offices and prepare a set of CbCR Instructions for internal use to align the basis of preparation.

For larger groups, especially those with different business lines and frequent M&A activities, a set of Frequently Asked Questions would be helpful as the first point of contact when the people in different jurisdictions involved in the data input face questions, as some of them may raise the same questions. Where applicable, part of the CbCR Instructions and FAQ can be disclosed in Table 3 of the CbCR. For example, the Instructions and FAQ may cover items such as:

  • How to report newly set-up CEs that have not closed their books as at the year-end date of the UPE
  • Source of data
  • Which entities are “related entities” for CbCR purposes
  • How to account for withholding taxes paid if the tax is calculated on a gross-up basis
  • How to report the tax paid in the case of a tax grouping
  • How to check the “main business activity(ies)” boxes for the different businesses of the group
  • Who is to determine if a CE is dormant

Approach to prepare the CbCR – Top-Down or Bottom-Up?

Obviously, if the group prepares the CbCR centrally at one location (say at the headquarters) based on financial data on CEs around the world that it possesses, it can achieve the best level of consistency. This Top-Down approach can avoid worldwide training for data input. However, the central location will inevitably need to obtain information from local CEs, and they may provide incorrect information if they do not understand CbCR. In addition, when the CbCR submitted is exchanged to the jurisdictions of the local CEs, the local CEs may be approached by the local tax office for explanations on the data. In such a situation, the headquarters will need to answer the questions from afar. The situation will become unmanageable if many tax offices ask questions at the same time.

Automation or manual input?

Another question that all MNE Groups would go through is: how to avoid the manual data collection process? There is no right or wrong answer to that and it is more a cost-benefit analysis. There are two important factors to consider: (i) whether the same accounting system is adopted across the group and (ii) whether the adjustments required (for example, identifying the related party transactions with CEs) can be dealt with by the system. Further, if the Group makes acquisitions, which often happen in the corporate world, substantial efforts may be required to change the legacy accounting system of the newly acquired entities. In real life, several different accounting systems may be deployed within an MNE Group.

How to manage the CbCR preparation

If an MNE Group is required to prepare CbCR and the bottom-up, manual input approach is adopted, the steps would include the following:

  1. Assign a Project Manager – a person who is knowledgeable about CbCR or has access to technical resources;
  2. Manage notifications across the group;
  3. Compile the list of CE for the reporting year and determine the tax jurisdiction of each entity including the tax haven entities;
  4. Assign a staff person from the finance or accounts department to each CE as the first level data input;
  5. Assign a “CbCR Champion” to each group of entities which can be based on jurisdiction and/or business lines. The CbCR Champions would need to ensure consistency in the data compilation and address questions, and review data input by staff. More difficult questions can be forwarded to the Project Manager for resolution;
  6. Prepare a detailed Instructions and FAQ and everyone involved in the process should study them before commencing work;
  7. Training for all involved in the process, timeline and the position taken on different aspects;
  8. Prepare an Excel format data input worksheet for data input;
  9. Staff perform data input and submit to CbCR champion for review with supporting documents (financial statements etc);
  10. Final review by the Project Manager and combine all input to prepare tables;
  11. Sign off by senior management;
  12. Convert the file into XML format (as requested by the tax office);
  13. Submission.

The above is not rocket science. However, each step requires careful planning and execution in order to meet the filing deadline. Needless to say, the more CEs spreading across different jurisdictions, the more difficult it will be to manage the process and the risk of error will increase. Training and project management will become most important.

In addition, although MNE Groups are given 12 months to prepare the CbCR, when they can actually commence data input depends on how long it takes post-year-end to finalise the local financial statements. The longer it takes to finalise the accounts, the less time there is to prepare for the CbCR. Realistically, the time available would likely be less than 9 months.

The Hong Kong Rules are Making Life Even Harder

The Hong Kong rules on CbCR fully incorporated the Action 13, CbCR Guidelines and CbCR Handbook. As long as MNE Groups follow these documents and adequately disclose some of the position taken, there should be relatively little concern of incorrect filing. However, on the administration side, MNE Groups with CEs in Hong Kong must pay special attention to the Hong Kong rules.

Notification – Section 58H

Section 58H under Division 3, Part 9A of the IRO sets out the requirement for notification: each Hong Kong CE of a reportable group must file a notification informing the IRD, effectively, which entity in Hong Kong will file the CbC Return* or, if the CbC Report* is to be filed in another jurisdiction, various information about such filing. One Hong Kong entity of the MNE Group can represent other group entities to file the notification. Notification deadline is within 3 months after the end of the year-end of the MNE Group.

* This article used the term “CbCR” in a broad sense to describe both the CbC Report (the three tables) that is filed with the tax office and the act of preparing the CbC Report. The Hong Kong rules distinguish between the “CbC Return” and the “CbC Report”. The CbC Report is the report containing the three tables discussed above. Under Section 58K(1), the CbC Return is the CbC Report and “any other information specified by the Board of Inland Revenue”.

In many jurisdictions (for example, the UK, Malaysia and South Korea), notification can be done by writing a letter or filling in a prescribed form. In Hong Kong, one needs to file notification via the CbC Reporting Portal (“Portal”). The Portal is developed by the IRD to facilitate the Hong Kong entities to:

  • submit notifications of obligations to file CbC Returns;
  • submit notifications of change of address;
  • file CbC Returns; and
  • receive or send messages in relation to CbC reporting.
IRD CbC Portal


Just like any online system, a registration procedure is required to access the Portal. A Hong Kong Entity should register a CbC Reporting Account under the Portal. The person authorized to register a CbC Reporting Account for the entity has to possess an e-Cert (Organisational) with AEOI Functions (“e-Cert”) for authentication purposes. The person has to apply for the e-Cert at the Hong Kong Post.

Manage Your Tax’s e-Cert (Organisation) with AEOI function

Filing – Section 58E and 58F

The deadline for the filing of a CbC Return is within 12 months after the end of the accounting period, which obviously shall be filed via the Portal. Similar to most jurisdictions, a CbC Report must be made in the form of an XML document for submission to the IRD. The reason for this is that XML documents can be validated and provide a common medium for exchange between the jurisdictions that have introduced CbCR requirements. In this regard, the IRD has developed a data schema in XML which is based on the CbC XML Schema v1.0.1 issued by the OECD. The data schema specifies the data structure and format for filing CbC Report to the IRD. The current version of the data schema and related user guide is available on the IRD website for download.

It is important to note that other than the information required in Table 1, 2 and 3 of the CbC Report, the XML Schema User Guide issued by the Hong Kong IRD mandatorily requires that the Tax Identification Number (“TIN”) of each CE, where issued by the tax administration of the tax jurisdiction of the CE, be provided. If the CE does not have a TIN, the value “NOTIN” shall be entered. In addition, the XML Schema User Guide “strongly recommended” that the address of each CE shall be provided. Finally, if the CE is a Permanent Establishment, the name of the CE should be followed by “(P.E.)”.

To the unwary, these additional information and formatting requirements may create an issue if only discovered upon XML conversion, potentially causing late filing.

Automatic Exchange of the CbCR

After filing the CbCR with the IRD as the UPE or SPE, can the MNE Group rely on the IRD to send the CbCR out to other tax jurisdictions such that the filing obligations there would be satisfied? It depends. Although Hong Kong has signed the CbC MCAA, the automatic exchange with applies for accounting period starting on or after 1 January 2019. Therefore, for a Hong Kong UPE or SPE who is filing a CbCR with the IRD for the accounting period for the year ended 31 December 2018, the IRD would only exchange it with the following 11 jurisdictions (as at 31 January 2019) based on bilateral exchange arrangement in place:

  • France
  • Guernsey
  • Ireland
  • Japan
  • Jersey
  • Korea
  • Malta
  • Netherlands
  • New Zealand
  • South Africa
  • United Kingdom

If the Hong Kong UPE has CEs in a jurisdiction not listed above which requires Local Filing (e.g. Germany), the Germany CEs may need to file the CbCR locally. If the Hong Kong UPE is also considered a resident in another jurisdiction and that jurisdiction has an exchange agreement with Germany, then it may file in a second CbCR with that jurisdiction to cover the German filing and elsewhere.

Record keeping – Section 58L

Section 58L requires that a Reporting Entity must (a) keep sufficient records to enable the accuracy and completeness of the CbC Return filed under this Division (i.e. Division 3, Part 9A of the IRO) to be readily ascertained; and (b) retain the records for a period of 6 years beginning on the date on which the return is filed. The burden on the Reporting Entity is indeed substantial and thus it is important to know which entity is the Reporting Entity.

Under Section 58J, a Reporting Entity includes (a) a Hong Kong UPE required to file a CbC Return (Section 58E(1)), (b) a Hong Kong entity that is required to file a CbC Return by Section 58F (i.e. either under Local Filing or the entity is appointed the SPE), and (c) a Hong Kong entity that is required to provide a notice by Section 58H.

If a Hong Kong UPE or SPE is required to file the CbC Return it is fair to expect that entity to possess information that satisfies Section 58L. It is debatable whether it is fair to demand the same level of record keeping for an entity that performs Local Filing. It is, however, unreasonable and unnecessary to impose statutory obligations for the entity that files only a notification under Section 58H to maintain sufficient records for 6 years to enable the accuracy and completeness of the Group’s CbC Return be ascertained.

To illustrate, assume a Korean conglomerate engaged in shipbuilding, mobile phone manufacturing, financial services and health care is filing the CbCR in Korea, and only the mobile phone division has subsidiaries in Hong Kong and are required to file CbCR notification to the IRD. The Hong Kong subsidiaries will need to maintain the CbCR information of the entire global group to the extent required under Section 58L. The IRD should not impose such record-keeping requirement on the Hong Kong subsidiary. If the IRD requires information, they should approach the Korean tax office to collect it. Hong Kong subsidiaries of foreign MNE groups are now faced with this unreasonable statutory requirement.

Penalties – Section 80G

Division 6 of Part 9A contains the penalty provisions for CbCR. The new Section 80G provides that a Reporting Entity commits an offence if the entity, without reasonable excuse: (a) fails to file the CbC Return (Section 58E(1) or 58F); (b) fails to file notification under Section 58H; or (c) fails to keep records as required under Section 58L. That Reporting Entity would be liable on conviction to a fine at level 5 (HK$50,000/US$6,400), and the court may order the entity to do, within the time specified in the order, the act that the entity has failed to do. The Reporting Entity is liable to a further fine of HK$500 for every day or part of a day during which the failure to file the CbC Return or notification continues after conviction.

Obviously, there are further penalty provisions for more serious offences.

The penalty provisions are quite harsh especially on MNE Groups filing CbCR outside of Hong Kong. Their Hong Kong operations may be small and with little internal tax support. If the Hong Kong CE, being a Reportable Entity, is not wholly owned by the UPE (i.e. there is a minority shareholder), for information protection reason the MNE Group may not want to provide the detailed records to the CE as required under Section 58L. Is such information protection a “reasonable excuse” for not fulfilling Section 58L? If not, the minority shareholder may demand compensation from the MNE Group for any penalties suffered.

Service Providers

A service provider may be engaged to perform the filing and notification. However, the Reporting Entity’s obligations are not relieved. In addition, the service provider is also subject to the same level of penalties as the Reporting Entity for failure to file the CbC Return or notify the IRD.

Concluding Comments

CbCR is a very unique tax return: there is no tax to be calculated and no money to be paid, the “taxpayer” can in some cases choose where to file it but need to comply with all the CbCR rules and regulations in all jurisdictions that the taxpayer operates in, and corporate restructuring or M&A could bring chaos to the filing. In an acquisition, the buyer will need to obtain warranties or indemnities from the seller for exposures relating to CbCR.

With all the complexities, jurisdictions should implement the CbCR rules in a lenient manner, thereby reducing the pain felt by businesses. For instance, Singapore only accepts UPE filing (i.e. the MNE Group whose UPE is a Singapore tax resident, and no Surrogate Parent or Local Filing is accepted) and the local tax office (IRAS) would inform the UPE that they need to file the CbCR. Why would Singapore give up such power to collect information?

For a relatively small tax jurisdiction like Singapore where many foreign MNE Groups have set up subsidiaries, as long as Singapore has wide AEOI network, she is going to obtain the CbCR filed by the MNE Group elsewhere without imposing undue filing burden on the local taxpayers. According to the OECD website, at present (February 2019), Singapore can obtain CbCR from 63 jurisdictions, mostly from 2016 onwards. Hong Kong can obtain the CbCR from 56 jurisdictions but mostly only from 2019 onwards (before 2019, Hong Kong can only exchange with the 11 jurisdictions mentioned earlier).

Even if Singapore is not collecting all CbCR now, over time, when all jurisdictions around the world have introduced CbCR rules (Action 13 is one of the minimum standards that over 125 jurisdictions, by joining the OECD Inclusive Framework, have agreed to implement), Singapore will collect all CbCR from MNE Groups that operate in Singapore. Comparing with Singapore, subsidiaries of foreign MNE Groups in Hong Kong face the Local Filing burden, notification requirement (and need to obtain the e-Cert), the record-keeping obligations, and face potentially very heavy penalties. Which jurisdiction is wiser: Singapore or Hong Kong?

In case one is not convinced, Singapore’s CbCR filing would be done by sending the CbCR in XML format to the IRAS simply by email.

Tax-imposing jurisdictions would care more about CbCR because they may be able to detect BEPS risks. Tax Havens, however, are introducing CbCR regulations mainly to satisfy the demands of the international community through their participation in the OECD Inclusive Framework. One would expect that Tax Havens would make the process simple and just do the collection and exchange of the CbCR. Not so. The British Virgin Islands (BVI) issued the CbCR Guidance Notes on 19 February 2019 which requires the MNE Groups to provide details of each BVI CE, including those being tax residents elsewhere, on an Excel template.

BVI CbCR Registration

It is probable that the designers of CbCR did not foresee the difficulties and trouble faced by MNE Groups for trying to meet the CbCR notification and filing requirements. Maybe they do not care because in their minds, the MNE Groups have been avoiding taxes and it is time to pay off. It can be foreseen that the tax offices, especially in the OECD countries, will soon announce that the CbCR is leading to successful tax audits recovering millions in taxes. If that is not happening, the scope of CbCR may be extended upon review in 2020, requiring MNE Groups to disclose more information, and lowering the revenue thresholds so that more MNE Groups will need to comply. More resources will have to be deployed by tax offices and MNE Groups to deal with CbCR.

Tax Tips

Readers should by now have an idea of how CbCR is going to hit like a tsunami, except that there is nowhere to hide if the revenue threshold is breached. The best advice is to start preparation early, especially for those MNE Groups that are about to breach the EUR750 million threshold soon. Pick the right Project Manager (we can help!) and do a Dry Run would be the best tips for handling CbCR compliance.

Readers should note that the objective of this article is to highlight the key provisions in the CbCR Rules. For completeness, Readers are advised to seek professional assistance to enhance their understanding of the rules, their obligations and the penalty provisions.

Lastly, answers to the true or false questions:

  1. CEs refer to entities that the UPE owns 50% or more. FALSE
  2. Representative Offices or Branches with separate accounts are themselves CEs. TRUE
  3. “Revenue” includes capital gains. TRUE
  4. Related parties transactions can be eliminated for reporting. FALSE
  5. Income tax paid does not include foreign taxes. FALSE
  6. A CE that left the group during the year (e.g. disposed of) can be excluded from the CbCR for that year. FALSE
  7. The number of employees includes independent contractors. TRUE
  8. The Tax Identification Numbers (taxpayer file number) and addresses of CEs are not required for CbCR filing. FALSE


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(This is an English translation of the Chinese article published in the Hong Kong Economic Journal Forum on 26 February 2019: https://manageyourtax.com/HKEJ Forum 20 )


BEPS Action 13: https://read.oecd-ilibrary.org/taxation/transfer-pricing-documentation-and-country-by-country-reporting-action-13-2015-final-report_9789264241480-en#page1

The Multilateral Competent Authority Agreement on the Exchange of CbC Reports: http://www.oecd.org/tax/automatic-exchange/about-automatic-exchange/cbc-mcaa.pdf

CbCR Exchange Relationship: http://www.oecd.org/tax/beps/country-by-country-exchange-relationships.htm

Country-Specific Information on Country-by-Country Reporting Implementation: http://www.oecd.org/tax/automatic-exchange/country-specific-information-on-country-by-country-reporting-implementation.htm

Singapore CbCR filing: https://www.iras.gov.sg/irashome/Quick-Links/International-Tax/Country-by-Country-Reporting–CbCR-/

Singapore e-tax guide on CbCR: https://www.iras.gov.sg/irashome/uploadedFiles/IRASHome/e-Tax_Guides/etaxguide_Income%20Tax_Country-by-Country%20Reporting_3rd.pdf

BVI Guidance Notes on CbCR: http://www.bvi.gov.vg/sites/default/files/ITA/BVI%20Guidance%20Notes%20for%20Country%20by%20Country%20Reporting.pdf

HK IRD notification extension: https://www.ird.gov.hk/eng/tax/dta_cbc_deadline.htm

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