HK moves to finalise treaties
Hong Kong is speeding up its efforts to sign double taxation treaties with its trade partners by the end of this year. In addition to the three treaties it has signed so far this year, the city intends to sign six more.
Tax professionals say that it is important for Hong Kong to sign tax treaties with as many trade partners as it can to maintain its position as the regional financial hub and to attract top-class professionals.
Ayesha MacPherson, partner-in-charge, tax, Hong Kong, at accounting firm KPMG, says that signing double taxation treaties with trade partners helps make clear guidelines as to what the tax structure is in other jurisdictions, reduce capital gains tax and strengthen Hong Kong's position as a financial and international business centre.
'It is important to have a double taxation treaty [with trading partners],' MacPherson says.
Fergus Wong, co-chairman, tax sub-committee, at accounting body ACCA Hong Kong, says signing a double taxation treaty helps foster trade. 'Signing a treaty with Hong Kong's important trading partners helps in confirming Hong Kong as a trading hub,' Wong says. He says such treaties help in bringing transparency in tax issues between two trading partners.
Double taxation arises when two or more tax jurisdictions overlap, such that the same item of income or profit is subject to tax in each. Hong Kong adopts the territoriality basis of taxation, whereby only income/profit sourced in Hong Kong is subject to tax and that derived from a source outside Hong Kong by a local resident is in most cases not taxed in Hong Kong.
Therefore, Hong Kong residents generally do not suffer from double taxation.
Many countries which tax their residents on a worldwide basis also provide their residents operating businesses in Hong Kong with unilateral tax credit relief for any Hong Kong tax paid on income/profit derived from Hong Kong.
Hong Kong allows a deduction for foreign tax paid on a turnover basis in respect of an income which is also subject to tax in Hong Kong. Businesses operating in Hong Kong do not generally have problems with double taxation of income. Earlier in the year the Hong Kong government said they were actively seeking to establish a network of comprehensive agreements for the avoidance of double taxation with major trading and investment partners.
So far Hong Kong has concluded agreements with Belgium, Thailand, the mainland and Luxembourg. Where negotiations for comprehensive agreements cannot be proceeded with immediately, the government is seeking to conclude limited double taxation avoidance agreements for airline and shipping income with relevant partners.
So far Hong Kong has signed 24 agreements on avoidance of double taxation agreements on airline income, six agreements on shipping income and two agreements on airline and shipping income.
Since the start of the year, the government has signed tax treaties with Brunei, the Netherlands and Indonesia.
The agreement eliminates double taxation on the same source of income, lowers the holding tax rate on passive income, including dividends, interests and royalties, and provides certainty and stability in terms of tax reliability for investors from each other's countries doing businesses in each other's economies.
MacPherson says that in January the Legislative Council passed a new amendment to the law which allows Hong Kong to upgrade its tax treaty, with the government speeding up the process of signing tax treaties with other jurisdictions.