Explaining initiative

Two articles in your newspaper ('New tax treaties may hit airlines', South China Morning Post, August 1, and 'Air-link pacts fuel debate on double taxation', Sunday Morning Post, August 4), show a misunderstanding of our recent initiative to incorporate a double taxation relief article into Air Services Agreements (ASAs).

Rather than attempt a laborious point by point rebuttal, perhaps it would be more helpful if I simply set out the facts. Due to the international nature of aircraft operations, the taxation of income from those operations is a grey area, as the income is mainly derived from activities carried on in international air space.

This makes it difficult to allocate, on a clear-cut basis, income among the countries visited in the course of an international flight. For this reason, many countries have introduced special tax rules for computing airline income, particularly for non-resident airline operators.

Besides, because most countries tax their residents on a worldwide basis, it is common for airline operators to suffer double taxation.

Many countries therefore seek to conclude a double taxation agreement with other countries so as to give them exclusive taxing rights in respect of their resident airlines.

The initiative to incorporate an avoidance of double taxation article in ASAs came both from our international aviation partners and from the local airlines. Under such provisions, Hong Kong will tax the income from international traffic of Hong Kong airlines derived from an agreement country and which has been granted full tax relief by that country.

In return, Hong Kong will forgo the right to tax the income of airlines of the agreement country derived from Hong Kong if such income is subject to tax in the agreement country.

We have been negotiating with our aviation partners on the inclusion of such an article in ASAs and the first one concluded so far is with the Republic of Korea. It is important to realise that ASAs are bilateral agreements between Hong Kong and each of the agreement countries.

Only Hong Kong airlines and airlines of the agreement countries are bound by the provisions in the respective ASAs. No other countries - and no other countries' airlines - will be affected by any ASAs which are not entered into by them. An international airline which is not covered by a double taxation agreement will continue to be taxed in Hong Kong on exactly the same basis as at present irrespective of whether it has any business in the corresponding agreement country or not.

Where a double taxation agreement is in place, both Hong Kong airlines and those of the agreement country will be subject to tax only in their respective home jurisdictions.

I hope it is now clear that some of the claims in the two articles have been made without any valid grounds.

Statements below are some of the examples: 'In many cases, double tax agreements may result in double tax being paid.' ' . . . a number of airlines in Asia and Australia are . . . facing higher tax bills following the signing of the air services agreement with South Korea.' ' . . . companies would lose out through double tax treaties by having to pay Hong Kong taxes they have not been liable for before.' 'The more air services agreements that are signed, the more international airlines stand to be affected, given the probability they will be paying more tax in Hong Kong.' We enter into negotiations on double taxation relief for airline income to address the unique situation of international airline operations. It should not be regarded as creating a precedent for the worldwide taxation of income on other types of Hong Kong businesses.

ALAN SIU for Secretary for the Treasury