HK seeks tax relief for cross-border firms

PUBLISHED : Friday, 15 July, 2005, 12:00am
UPDATED : Friday, 15 July, 2005, 12:00am

Hong Kong is seeking a comprehensive double taxation treaty with the mainland that will reduce the tax burden for many companies with cross-border operations, but could also open the way for both governments to share tax data.

Officials from the Inland Revenue Department will meet their mainland counterparts on September 5 for three days of preliminary discussions aimed at expanding and updating double taxation relief measures that have been in place since 1998, Secretary for Financial Services and the Treasury Frederick Ma Si-hang confirmed yesterday.

Mr Ma argued that the existing measures were too narrow for the current business environment.

'The negotiations will expand the scope of the agreement to save Hong Kong and mainland companies' cross-border operations from double taxation,' he said in a speech to the Hong Kong Federation of Industries. 'With Hong Kong and China developing a closer economic relationship, we have to expand the scope of the original agreement.

'This will ensure Hong Kong's competitiveness and encourage more international investors to use Hong Kong as a springboard for their China investments.'

The 1998 agreement applies primarily to Hong Kong companies with factories across the border, allowing them to split their profits tax 50-50 between Hong Kong and the mainland. The agreement signed seven years ago also allows individuals to avoid double tax.

However, it contains no provisions for service-sector firms, which Hong Kong investors are establishing with increasing frequency on the mainland, or the treatment of withholding taxes relating to royalty payments, interest and dividends.

According to PricewaterhouseCoopers tax partner Tim Lui Tim-leung, a comprehensive treaty could lower companies' effective dividend tax rate from 20 per cent to 5 per cent, and their tax on interest income from 10 per cent to 7 per cent.

China imposes a 33 per cent corporate profits tax, but foreign investors can temporarily qualify for rates as low as 15 per cent. Hong Kong's equivalent rate is 17.5 per cent.

Mr Lui said double taxation treaties signed in 2003 between the mainland and Macau and between Hong Kong and Belgium would serve as models for the negotiations.

But he and other tax experts warned that such agreements also provide for the exchange of tax information between jurisdictions.

'A double taxation treaty will allow Hong Kong and mainland tax authorities to exchange information to trace tax avoidance,' Mr Lui said. 'This may not be good news for many Hong Kong companies as their China operations will become more transparent to [China's] State Administration of Taxation. The Hong Kong government will need to study the treaty cautiously.'

This would make it harder, for example, for companies to get away with tax avoidance schemes such as 'transfer pricing', whereby a company shifts profits from its mainland operations to Hong Kong to take advantage of the city's lower tax rates.