HK issues New Guidance on Foreign Tax Credits

New guidance notes on the deduction of foreign taxes have been released by Hong Kong’s Inland Revenue Department.

All outgoings and expenses are allowed as deductions, as set out in Section 16 of the Inland Revenue Ordinance. Under the new guidelines, while capital gains tax is disallowed as being attributable to capital and not to profits or income, taxes and duties that are not calculated by reference to profits will be considered for deduction.

The deductions may include the following:

• rates levied on properties;
• vehicle licence fee;
• duties on commodities;
• foreign taxes and duties not levied by reference to profits, as in Harrods (Buenos Aires) Ltd v Taylor-Gooby ([1964] 41 TC 450), which concerned an Argentine tax levied on companies at a flat rate of one percent of capital per year, irrespective of profits.

Under Section 16(1)(c), taxpayers are allowed to deduct tax of substantially the same nature as tax imposed under the Inland Revenue Ordinance if the Commissioner is satisfied that these have been paid elsewhere other than in a territory with which Hong Kong has agreed double taxation arrangements (DTA).

The relief is not allowed if the foreign tax is paid in a DTA jurisdiction; and under the DTA with that territory relief from double taxation is provided by way of credit under Section 50.

According to the guidelines, “the reason for denying a deduction under section 16(1)(c) is that a DTA is intended to provide a comprehensive solution to all tax matters which are within its scope”. The international practice says that where a DTA is in effect, relief from double taxation should be allowed under the DTA only to the extent contemplated by it.

Filed under: Business and Economy, HK as a Financial Centre, News and politics, Taxation

HK reached record high of USD 43.5 billion in tax revenue in 2018

Hong Kong’s tax revenue hit a record HK$341.4 billion, which is USD 43.5 billion, in the past financial year, surpassing the previous peak largely on the back of a 20% surge in profits tax. However, tax officials suggest that the trend will not last long. They forecast a 2% drop in revenue for the 2019-2020 financial year. The government of Hong Kong has also presented a bit pessimistic economic outlook.

The Inland Revenue Department has recently announced that overall tax revenue collected increased by 4% to HK$341.4 billion in the 2018-2019 financial year, trumping last year’s record of HK$328.6 billion.

Out of the total collected revenues, 4 kinds of tax brought in record-high figures. These are profits tax, property tax, personal assessment taxes and betting duty. Profits tax accounted for HK$166.6 billion in earnings, close to half of the total, while salaries tax, which covered 2.68 million people, brought in HK$60.1 billion.

Filed under: Business and Economy, Financial statistics, HK as a Financial Centre, Investor's news, News and politics, Taxation

HK Tax Revenue up 13% for 2017-2018 amidst higher stamp duty receipts

The Hong Kong’s Inland Revenue collected 13% more in tax revenue or HK$328.6 billion for 2017-18, which was conditioned by higher stamp duty receipts.

“The property price has increased quite dramatically in 2017. On top of that, the number of property transactions in 2017-18 has also increased,” said Commissioner of Inland Revenue Wong Kuen-fai. “ He added that the increase in the number of property transactions in 2017 will account partly for the increase in stamp duty.

Home prices in Hong Kong are amongst the most expensive in the world with some residents turning to micro flats or homes less than 20 square meters just to get on the housing ladder.

Profits tax collection stood at HK$139.1 billion, similar to the previous year, and salaries tax collection increased by 3% to HK$ 60.8 billion. Wong forecasts total revenue collection at HK$343.3 billion for the coming year.

The government is also rolling out a 2-tiered tax system from 2018-2019 which slashes the tax rate for the first $2m of company profits to 8.25%. Profits above that will be subjected to 16.25% tax rate.

It should be noted that the new tax regime is aimed at reducing the tax burden on businesses especially SMEs (small and medium-sized enterprises) and startups.

Filed under: Business and Economy, International Business Environment, News and politics, Taxation

IMF urges HK to introduce Tax Reforms

The International Monetary Fund (IMF) has urged Hong Kong to consider tax reform options in order to boost revenues  as well as maintain the competitiveness and flexibility of its economy.

In its annual report on the jurisdiction, the Fund observed that Hong Kong has become heavily reliant on real estate-related revenues and other volatile sources. Property transaction and recurrent real estate taxes accounted for more than 28% of total revenues on average during 2010-2016, up from an average of around 20% in the 2000s, according to the report.

The IMF noted that Hong Kong SAR relies more on tax revenue from property than other economies.

According to the IMF, Hong Kong also heavily relies on corporate tax revenues, with these accounting for 30% of revenues in 2015/2016, so, such revenues are “highly subject to the business cycle”.

The report said that Hong Kong’s authorities should start studying options to diversify and increase revenue streams in a “growth friendly way.”

The IMF’s main recommendation was the introduction of a value-added tax (VAT) or sales tax. This proposal has been studied and rejected in the past.

It also called for more progressive taxation, with Hong Kong’s top marginal rate low even in comparison to other low-tax financial centers.

Filed under: Business and Economy, HK as a Financial Centre, International Business Environment, News and politics, Offshore Legislation, Taxation

HK to offer Tax Breaks for Innovators

Hong Kong Chief Executive Carrie Lam is set to announce new tax incentives aimed at boosting the innovation and technology sector in her October Policy Address.

The news was announced by Secretary for Innovation and Technology Nicholas Yang, and confirmed in a government statement.

In addition, Hong Kong will launch a new Innovation and Technology Venture Fund. This fund is expected to launch in September 2017.

Yang said: “Right now, we are just finalizing some of the legal details because it turns out that we need to sign a lot of legal documents with the venture capitalists and also the so-called investees (the people who will receive the funding)”. Also, it was noted that the agreement should be done in a robust manner.

Filed under: Business and Economy, International Business Environment, News and politics, Taxation

Hong Kong stars Budget Consultations

On October 3, the Government of Hong Kong announced the public consultation exercise for the 2017 Policy Address and the 2017-2018 Budget.

The Chief Executive’s Policy Address is usually given in January, while the Budget is unveiled during the following month. However, the consultation exercise for both is held together this year in order to “enable the community to have more comprehensive discussion so that the Government could extensively collect views from members of the public.”

A website has been set up to collect public views. The Government urges members of the public to give their views on the website or by email.

Filed under: Business and Economy, HK as a Financial Centre, News and politics

Hong Kong gazettes DTAs with Russia and Romania

Hong Kong has newly gazetted 2 new double tax agreements (DTA) with Russia and Romania, which will lower tax rates on cross-border trade and investment.

Under the double tax agreement between Hong Kong and Russia, any Hong Kong income tax paid by Russian residents or companies shall be allowed as a credit against any tax payable in respect of the same income in Russia. The withholding tax rate on royalties derived by Hong Kong residents in Russia will be reduced from the current rate of 20% for companies or 30% for individuals to 3%. The withholding tax rate on dividends derived by Hong Kong residents in Russia will be reduced from the current rate of 15% to 5% or 10%. The cap of 5% would be applicable if the beneficial owner is a company which holds directly at least 15% of the capital of the company paying the dividends. Profits from international shipping transport earned by Hong Kong residents that arise in Russia will enjoy full tax exemption. Hong Kong airlines operating flights to Russia will only be taxed in Hong Kong at Hong Kong’s corporation tax rate.

Under the double tax agreement between Hong Kong and Romania, Hong Kong income tax paid by Romanian residents or companies will be allowed as a deduction from any tax payable in respect of the same income in Romania. The withholding tax rate on royalties derived by Hong Kong residents in Romania will be reduced from the current rate of 16% to 3%. The withholding tax rate on interest derived by Hong Kong residents in Romania will be reduced from the current rate of 16% to 0% or 3%. The 0 rate would be applicable if Hong Kong levies no withholding tax on interest. The withholding tax rate on dividends derived by Hong Kong residents in Romania will be reduced from the current rate of 16% to 3% or 5%. The cap of 3% would be applicable if the beneficial owner is a company which holds directly at least 15% of the capital of the company paying the dividends. Profits from international shipping transport earned by Hong Kong residents that arise in Romania will enjoy full tax exemption.

Filed under: Business and Economy, News and politics, Offshore Legislation, Taxation

Hong Kong forex reserves fall

Hong Kong’s official foreign currency reserve assets fell to USD 355.8 billion at the end of November. This fall from USD 357.1 billion in October was announced by the Hong Kong Monetary Authority.

The total foreign currency reserve assets of USD 355.8 billion represent about 8 times the currency in circulation or 48% of Hong Kong dollar M3.

Filed under: Business and Economy, HK as a Financial Centre, News and politics

HK should focus on Economy, not Politics, China’s Official says

China’s top official in Hong Kong said that the territory should shift its focus away from worrying about political reform and concentrate instead on economic development and improving people’s livelihoods.

Mr Zhang Xiaoming, the head of China’s Liaison Office in Hong Kong, was speaking in two weeks after Hong Kong’s legislature rejected a Beijing-backed electoral reform package in a dramatic vote.

The rejection was a rare instance of Hong Kong voting so heavily against a proposal endorsed by Beijing. Hong Kong has been governed as a Special Administrative Region (SAR) since its return to China in 1997, which means it has a different legal system and enjoys freedoms not permitted on the mainland.

Mr Zhang said: “The whole society should make concerted efforts to support the SAR government in shifting the focus to developing the economy, improving people’s livelihood and promoting social harmony”.

Filed under: Business and Economy, News and politics

HK disagrees with EU on new Tax Blacklist

The Government of Hong Kong expressed its regret that the European Union included the jurisdiction into the list of non-cooperative tax jurisdictions. The Government claimed that, as regards tax matters, criticism of its transparency is “totally unfounded.”

The EU tax blacklist was included in the European Commission’s new Corporate Tax Reform Action Plan. The plan with the blacklist was released on June 17, 2015 and features the territories included on 10 or more EU member state blacklists.

On June 18, the Government issued a statement to underline that Hong Kong has always supported international efforts to enhance tax transparency as well as fight tax evasion, so it is “puzzled and very disappointed to note that the Commission has regarded Hong Kong as non-tax cooperative.”

It was added that Hong Kong was denied any opportunity to comment on or clarify its position before the proposed blacklisting, which it said was “unilateral and procedurally unfair.”

It was stressed in the statement that Hong Kong accords priority to expanding its network of comprehensive double taxation agreements (CDTAs) and tax information exchange agreements (TIEAs). All CDTAs and TIEAs signed by Hong Kong have included an article on the exchange of information in line with international standards. Currently, the territory has signed 32 CDTAs and 7 TIEAs.

The Government of Hong Kong strongly urged the European Commission to review with member states their lists of non-cooperative tax jurisdictions to reflect the latest developments in Hong Kong’s tax co-operation with those jurisdictions. According to the Government, it “seriously refuted any allegation that Hong Kong is a tax haven.”

Filed under: Business and Economy, International Business Environment, News and politics, Offshore services, Taxation