Experts call for bigger tax breaks for funds

PUBLISHED : Monday, 05 September, 2005, 12:00am
UPDATED : Monday, 05 September, 2005, 12:00am

They say proposed law does not go far enough to attract offshore funds to HK

Tax experts are urging the government to widen the scope of the proposed tax exemption law governing offshore funds in a bid to encourage more fund management companies to operate in Hong Kong.

PricewaterhouseCoopers Asia Pacific tax leader Florence Yip Kwai-fong said the proposed law change was a good first step to promote the fund industry but did not go far enough as it only exempted funds from paying profits tax if their 'central management and control' were outside Hong Kong.

'This effectively means the operations of the fund managers, their directors and board meetings could not be carried out in Hong Kong if they want to enjoy the tax exemption. This is against the purpose of the law changes to attract more fund management companies to Hong Kong,' said Ms Yip.

She suggested the government grant exemption to the funds on the condition that they use the services of local fund professionals such as fund managers, trustees, or brokers.

'I believe this would be simpler and attract more fund management companies and the related service providers to Hong Kong. If that were to happen, it would strengthen Hong Kong's role as an international fund management hub,' Ms Yip said.

The law now exempts all 1,900 funds registered with the Securities and Futures Commission (SFC) from paying the standard 17.5 per cent tax on profits, but it does not cover the thousands of offshore funds registered overseas that invest in Hong Kong securities.

Of the $2.74 trillion of assets managed by the Hong Kong licensed fund houses last year, 47 per cent were offshore funds set up outside Hong Kong but managed and invested in the local securities market, according to SFC figures.

Despite the strong figures, Hong Kong is facing competitive pressure from Singapore, which is offering lower tax rates and other incentives to attract fund houses to set up there.

The Hong Kong government has held two consultations in the past two years and submitted the Profits Tax Exemption for Offshore Funds Bill to the Legislative Council in July. Ms Yip and other tax experts will meet with the Legco bills committee on September 29 to discuss the issue.

Ernst & Young tax partner Florence Chan Yuen-fan said earlier that in Singapore, offshore funds are exempt from a 20 per cent profits tax if the funds are 80 per cent invested by non-Singapore residents, regardless of whether they are managed and controlled in the country. Ms Chan believes this is better than Hong Kong's proposal.

Ms Yip said even if the government insisted on using the 'central management and control' concept to define an offshore fund for tax exemption purpose, the government should set guidelines on details such as where a fund's board meetings should be held; where its chairman must live outside Hong Kong; and whether a majority of its directors are from overseas.

'A clear guideline is needed to remove any uncertainty,' she said.

Ms Yip would also like to see the government widen the scope of investment for offshore funds to enjoy the tax exemption. The proposed tax waiver only applies to profits arising from trading of securities, futures, and leverage foreign exchange contracts.

'This is not wide and flexible enough to cover all new investment products,' Ms Yip said. 'Hong Kong could consider following the British law that gives tax exemption on profit from trading all kinds of investment products except those specified.'

A spokesman for the Financial Services and the Treasury Bureau said: 'We welcome views from deputations on the offshore fund bill and we will consider the comments made by various stakeholders.'

Industry sources said the government is considering the suggestions by the tax experts and is likely to make some modifications to the current proposal before the bill committee discusses the issue on September 29.