He says any cross-border business strategy should make taxation matters a priority. These should include anti-avoidance provisions, audit requirements and international tax issues such as transfer-pricing opportunities and risks, as well as the double tax treaty arrangement.

'The China tax system varies in many ways from the Hong Kong system in terms of the tax base, the scope of charge, types of taxes imposed, and the complexity of the legislation,' Dr Chan says.

In Hong Kong, the taxation structure under the Inland Revenue Ordinance is relatively straightforward. There is no 'total income concept', and tax is imposed separately for different classes of income under the categories of property tax, salaries tax and profits tax (the exception being 'personal assessment', covering an aggregate income from different sources, which is subject to election by the taxpayer).

In China, various direct and indirect taxes are imposed, including the main categories of value-added tax, business tax, consumption tax and taxes concerning foreign investment enterprises.

Under the heading 'others' are taxes on land value appreciation, natural resources, land use, real estate, vehicles and vessels and a slaughtering tax, a share transaction tax and more.

Dr Chan says Hong Kong accountants, who are trained and experienced in western market-economies and familiar with international law and standards, are best placed to provide overseas investors with a professional services platform to the mainland.

'They usually have good networking with their counterparts in the mainland and are familiar with the business environment in China, including its tax system and practices.'

To help accounting professionals, graduates and business managers understand their tax obligations in the mainland, the School of Accounting and Finance at Hong Kong Polytechnic University has published the Monograph of Taxation Reforms in China.

Edited by associate professor Stella Cho, the book covers the evolutionary development of China's taxation reforms, its tax regime, and strategic tax issues and planning opportunities. Its contents include tax administration, pricing issues and a number of tax issues facing foreign entities operating in China.

Dr Cho agrees that Hong Kong's low and simple tax regime gives it a key competitive advantage.

It enables ample tax planning opportunities whereby trading, service and finance companies can benefit from the territorial source rules and the low tax rate. And with tax exemptions on dividends and capital gains, Hong Kong is also a preferred place for setting up holding companies, Dr Cho says.

The signing of a Memorandum on the Arrangement for the Avoidance of Double Taxation with the mainland in 1998 helps solve some of the double tax issues between Hong Kong and the mainland, she says.

'It provides certainty on how residents of both sides are being taxed. It is worth noting that a Hong Kong resident having to pay double tax in Hong Kong and in the mainland is not precluded from claiming tax exemption and tax deduction than otherwise permitted in the Inland Revenue Ordinance, should [that person] find it more tax efficient to do so.

'The concept of permanent establishment is defined with reference to international practices. According to the definitions, the establishment or an existence of a place of management, for example an office, factory or workshop, constitutes a permanent establishment and is taxed in the other jurisdiction to the extent of the profits or income derived there.'

Mainland China Tax Structure

Turnover taxes

Value-added tax

Business tax

Consumption tax

Income taxes

Income tax concerning foreign investment enterprises and foreign enterprises

Enterprises income tax

Individual income tax

Other taxes include

Land value appreciation tax

Natural resources tax

Land use tax

Real estate tax

Vehicle and vessel tax

Deed tax

City and rural area maintenance and construction tax

Stamp Tax

Slaughtering tax

Share transaction tax