We are writing further to the previous Association circulars on the captioned subject.

To follow up on the Secretariat discussion with the Government about the application of the global anti-base erosion (“GloBE”) rules under Pillar Two on the shipping industry, we sum up below the advice given by the authorities:

1. Government guidelines for the business sector (in addition to the OECD commentary)

– The Government recognises stakeholders’ concerns on the application of the GloBE rules and will continue to make efforts to reduce taxpayers’ compliance burden and enhance tax certainty.

– The Inland Revenue Department (IRD) will provide guidance, including frequently asked questions, on the application and requirements of the provisions of the Inland Revenue Ordinance in relation to the GloBE rules after the completion of the legislative work.

2. Eligibility of shipping surcharges for international shipping income exclusion

– Article 3.3 of the GloBE rules adopts a qualified income approach based on the scope of Article 8 of the OECD Model Tax Convention for excluding profits from transportation of passengers or cargo by ships in international traffic.

– Many shipping surcharges (e.g. terminal handling fees, customs clearance fees and documentation fees) are charged by shipping carriers to cover costs they paid to shipping terminals and custom of countries and territories during the transportation of passengers or cargos. In the circumstances, such surcharges are derived from activities directly connected with the operations of the shipping carriers for earning ocean freight from the transportation of passengers or cargo. The net income in respect of the ocean freight of the transportation of passengers or cargo as well as the surcharge in relation to such transportation would be eligible for the international shipping income exclusion if the requirements under Article 3.3 of the GloBE rules are met.

3. The exclusion of inland transportation income from international shipping income exclusion

– Article 3.3.2 of the GloBE rules provides that the international shipping income exclusion does not apply to net income obtained from the transportation of passengers or cargo by ships via inland waterways within the same jurisdiction. Inland transportation is also not covered as a qualified ancillary activity to an international shipping income under Article 3.3.3 of the GloBE rules despite that inland transportation connected with international shipping is regarded as an ancillary activity under Article 8 of the OECD Model Tax Convention (paragraph 7 of its Commentary and the example therein).

– As explained in paragraph 171 of Chapter 3 of the Commentary to the GloBE rules, such exclusion is intended to mitigate the risk of competitive distortions between shipping companies that have vertically integrated such services as part of their international shipping operation and independent freight forwarding and land-based logistics service providers.

– The term “inland transportation” is not defined in the GloBE rules, its Commentary and Administrative Guidance. Thus, the term is interpreted based on its ordinary meaning in the context of the GloBE rules. Modes of inland transportation, as commonly described in the shipping industry, should include transport by road, by rail, on inland waterways and through pipelines and not be limited to a particular category of transportation.

– In the case of a multimodal transportation where a shipping carrier is responsible to handle all legs of the journey under a single contract, the fee charged might be a single or “all-in” fee to its customers. Yet, the shipping carrier should have information on the fee attributable to each transport leg based on its established pricing policy and associated costs. The shipping carriers are advised to keep sufficient record showing the basis of computation of the fee charged under the single contract, the rates charged in respect of each transport leg under a multimodal transportation or that would have been charged under an intermodal transportation, and the costs associated to the International shipping income, for ascertaining the amounts of international shipping income, qualified ancillary international shipping income and other income (e.g. inland transportation income) for the purposes of the GloBE rules.

4. Income from non short-term container shipping

– Under Article 3.3.3(c) of the GloBE rules, income obtained by a constituent entity from the leasing and short-term storage of containers that are performed primarily in connection with the transportation of passengers or cargo by ships in international traffic is a qualified ancillary international shipping income. To this end, insofar as the leasing of containers are connected to operation of ships in international traffic, irrespective of the term of leasing, it would be regarded as an ancillary international shipping activity.

5. Shipping income derived by non-vessel operating common carriers (NVOCC)

– Under Article 3.3.6 of the GloBE rules, the constituent entity must demonstrate that the strategic or commecial management of all ships concerned is effectively carried on from within the jurisdiction where the constituent entity is located in order for the international shipping income exclusion to apply.

– NVOCC is a transportation intermediary that performs services as an ocean career but does not own or operate any ships. In this regard, if the NVOCC does not have any control of each ship it uses in international shipping, the income derived by NVOCC should not be eligible for the international shipping income exclusion.

6. Requirements for “commercial or strategy management” of ships

– The aim of Article 3.3.6 of the GloBE rules is to ensure that strategic or commercial management of all ships deployed in earning international shipping income is effectively carried on from within the jurisdiction where the constituent entity is located. The Commentary to the GlobBE rules provides guidance on the interpretation of the term “strategic or commercial management” of the ship concerned.

– Strategic management includes making decisions on significant capital expenditure and asset disposals (e.g. purchase and sale of ships), award of major contracts, agreements on strategic alliances and vessels pooling, and the direction of foreign establishments. Relevant factors that demonstrate strategic management include location of decision-makers (including senior management staff), location of company board meetings, location of operational board meetings, and residence of directors and key employees.

– Commercial management includes route planning, taking bookings for cargo or passengers, insurance, financing, personnel management, provisioning and training. Relevant factors that demonstrate commercial management include the number of employees engaged in these activities in the jurisdiction, the nature and extent of the accommodation occupied in the jurisdiction, and the country of residence of key management staff, including company directors.

– Whether the strategic or commercial management is effectively carried on from within the jurisdiction where the constituent entity is located should be determined on the own facts and circumstances of each case.

The above advice is (only) for your reference please. We would like to reiterate that members should assess the potential impact of the subject matter on their company operations and seek their own expert advice and take necessary action.

Members may also wish to consult the designated help desk of the IRD for the implementation of the GloBE rules for Hong Kong minimum top-up tax. Please call the enquiry hotline at 2594 1600 or email to beps2.0@ird.gov.hk.

Thank you for your attention.