Air-link pacts fuel debate on double taxation

PUBLISHED : Sunday, 04 August, 1996, 12:00am
UPDATED : Sunday, 04 August, 1996, 12:00am

IT has been well reported that Hong Kong's tax specialists have been weighed down with work over the past week, slaving over piles of corporate tax returns in frantic bids to avoid penalties for late filing.

But many have still found time while trying to get papers to Revenue Tower to express a wide range of views on a simple issue that threatens to turn into a major debate - whether double-tax treaties will benefit Hong Kong companies.

Supporters in the tax profession claim Hong Kong companies are losing huge amounts of money through the imposition of withholding taxes for foreign governments.

Detractors maintain that, in many instances, companies would lose out through double-tax treaties by having to pay Hong Kong taxes they have not been liable for before.

The case for new double-tax treaties has been championed by some leading firms, such as Coopers & Lybrand. Coopers maintains that the absence of double-tax treaties is posing a threat to the prosperity of the territory.

They say Hong Kong's image as a tax haven is falling apart and that there is an over-confidence among legislators in its low-tax status that threatens investment.

Hong Kong's tax system ignores the fact that domestic companies are hit with high amounts of withholding tax on an array of income, something that double-tax treaties would rectify.

This viewpoint is supported by Hong Kong companies that derive a substantial proportion of their profits from offshore - like Cathay Pacific, which in the past has paid tax virtually wherever it has operated.

Others say many companies may be penalised by double-tax treaties.

This flaw has been highlighted by moves to incorporate double-tax treaties into air services agreements to be signed between Hong Kong and other jurisdictions.

Only one has been sealed - between Hong Kong and South Korea - but a number of others are close to agreement.

Accounting firms representing the Hong Kong offices of many international airlines other than Cathay Pacific and Dragonair indicated last week they would be lobbying heavily against the proposed agreements, based on experience from the South Korean deal.

Hong Kong tax will now be paid on profits made in the territory and the relevant airline's home country, unless profits are already subject to tax in that country.

This means tax that is not paid overseas must now be paid in Hong Kong.

In many cases, double-tax agreements may result in double tax being paid.

According to Debbie Annells, tax director at Grant Thornton Byrne, the problems are not restricted to air services agreements. Double-tax treaties call into question the integrity of the tax system by 'deeming what are really offshore profits to be local'.

All of which prepares the ground for a spirited debate in the tax profession in the coming months.