Tax uncertainty is bad for business
The saying goes that a man is a fool to pay a cent more in tax than he has to. Hence tax avoidance can be legitimate, if tax dodging is not. But 200,000 Hong Kong residents working on the mainland, along with 600,000 foreign nationals, still have a chance to dodge a bullet in the form of a new social security tax, if the government shows a greater sense of urgency about it. Thanks to administrative and legislative delays, they have already had a reprieve from the original start date of July 1.
Under the National Insurance law, all foreign workers will have to contribute for coverage by medical insurance, unemployment benefits, workplace-injury compensation, maternity leave and a housing provident fund. The stakes are high. A foreign worker earning 10,000 yuan (HK$12,068) a month would pay 1,800 yuan in social security on top of 335 yuan in income tax - more than 21 per cent of their salary - and foreign firms would pay 4,400 yuan a month.
Because Hong Kong has a different tax regime its residents employed in China are considered overseas workers.
South Korea and Germany already have agreements with Beijing that mutually exempt their nationals from paying local social security tax. More than 10 other governments are in talks on bilateral tax agreements that would exempt their nationals and companies. This makes sense because the targeting of the tax at foreigners does not. Those it is aimed at generally work for big corporations, which already provide health care and other social safety nets.
However, these negotiations apparently do not include Hong Kong. A government spokesman says it has been reflecting Hong Kong businesses' concerns through established communication channels. But relevant bureaus, such as Constitutional and Mainland Affairs, and Financial Services and the Treasury, have said they are not seeking an agreement and do not know which department would be responsible.
The Hong Kong General Chamber of Commerce hopes the new regulations will include a special waiver for Hongkongers. Granted many aspects of the new regulation remain unclear - such as whether it will apply to all foreign workers or just those on local contracts. But there is no room for complacency. This kind of uncertainty is bad for business. The tax has the potential to put Hong Kong firms at an unfair competitive disadvantage. Sources familiar with the national social insurance law say it has now been finalised and is awaiting State Council approval. Details are not expected to be revealed for another two months and it is unlikely the law will take effect before the new year. Hong Kong must seize this window of opportunity to remove the uncertainty. After all, integration with the mainland could see many more of the city's residents exposed to additional tax liability.