Funds sector urges wider double-taxation treaty

PUBLISHED : Monday, 01 August, 2005, 12:00am
UPDATED : Monday, 01 August, 2005, 12:00am

The funds industry guild will lobby the government for a double-taxation treaty with other economies and a waiver of profit taxes on annuity products for pensioners, according to a senior industry executive.

Hong Kong Investment Fund Association chairman Au King-lun told the South China Morning Post a formal proposal would be presented soon.

'The government has put a lot of effort into promoting the local funds industry recently by proposing the abolition of estate duty and the exemption of offshore funds from profit taxes,' Mr Au said. 'But we would like to see it doing more.'

Mr Au said that under present law, retirees who take lump-sum pension payments do not pay tax.

However, if pensioners subsequently use the pension proceeds to buy a single-premium annuity policy from insurance companies or fund houses, they would be subject to salaries taxes levied on the monthly annuity payments.

'This tax requirement has discouraged retirees from buying annuities and they instead try to invest the money themselves,' Mr Au said.

'They may make serious investment errors, putting their pensions at risk.'

Annuities - immediate or deferred - ensured pensioners a stable income while the principal was protected by professional fund managers, he said.

The association would also like to see Hong Kong pursue a double taxation treaty for the funds industry with other economies.

In addition to preventing double taxation, such treaties usually result in other forms of relief, including lower withholding taxes. Luxemburg, for example, levies a 15 per cent withholding tax on corporate dividends for funds domiciled in nations with which it has signed double taxation accords, compared with 30 per cent for other funds.

Secretary for Financial Services and the Treasury Frederick Ma Si-hang has said tax officials would meet their mainland counterparts next month for a preliminary discussions aimed at expanding and updating double-taxation relief measures in place since 1998.

The 1998 agreement applies mainly to Hong Kong companies with factories across the border, allowing them to split their profits tax payments 50-50 between Hong Kong and the mainland.

The agreement contains no provisions for service-sector firms, or on treatment of withholding taxes relating to royalty payments, interest and dividends.

Mr Au hopes to see a Hong Kong-mainland tax accord that would lower withholding taxes for funds.

PricewaterhouseCoopers tax partner Tim Lui Tim-leung cautioned that a treaty would also provide Hong Kong and mainland tax departments a means of exchanging information. 'There are pros and cons,' he said.