Tax in its various forms may be one of the inevitable facts of life, but the recent series of double taxation agreements (DTAs) signed by the Hong Kong government could provide companies with a range of attractive benefits.
DTAs involve deals between two jurisdictions, and are designed to cut instances of double taxation on the same source of income and lower or eliminate withholding tax, which includes dividends and royalties.
Ayesha Macpherson, tax partner in charge at KPMG Hong Kong, says that this year Hong Kong has been the most proactive Asian jurisdiction in signing double tax agreements. 'So far this year, Hong Kong has signed nine [agreements], has agreed to three more ready for signing and has at least 11 more in the pipeline. Compared with similar [agreements] signed around the region, Hong Kong leads the process by about 300 per cent,' she says.
Hong Kong has 14 DTAs in place, including a special one with the mainland. However, Macpherson says Hong Kong still has some ground to make up in order to establish a comprehensive DTA network. Australia has more than 40 agreements, the mainland more than 90 and Singapore more than 60.
Hong Kong's previous shortfall is attributed to an inability to meet the most recent international Organisation for Economic Co-operation and Development (OECD) criteria for the exchange of tax information. Amendments to the law, which took effect in March, allow the Inland Revenue Department to obtain and exchange information that complies with the 2004 OECD requirements.
Macpherson says that for most types of income, especially business profits and investment income, double taxation is avoided in agreements based on the OECD tax convention by allocating taxing rights between the resident and source countries, and by requiring the former to eliminate double taxation where there are competing taxing rights. She says DTAs could benefit employees and indirectly their employers through the extended number of mandated days an individual can work in a partner's country without triggering a salaries tax obligation. The number of permitted days is typically 183. 'As businesses increasingly globalise their business operations and their workforce becomes more mobile, the 183-day period offers some strategic advantages for employees and their companies,' Macpherson says.
With more tax agreements in place, Macpherson says tax accountants are in a strong position to advise their clients how they can maximise benefits from the new arrangements by, for example, how they structure their operations and organise their workforce. Tax accountants could also advise clients on the specific details of double tax structures relating to different jurisdictions and how to meet compliance requirements.
Nick Dignan, corporate tax partner with PricewaterhouseCoopers (PwC) Hong Kong, says DTAs have strengthened Hong Kong's status as an international business centre. 'Companies considering setting up a holding company look for a good range of double tax agreements, plus a favourable domestic tax regime, which make Hong Kong attractive because it doesn't tax offshore profits or dividends,' he says
Dignan says the ability to increase DTAs has boosted Hong Kong's credentials as a preferred location to establish a holding company in the Asia-Pacific region, whereas before companies might have looked at Singapore.
David Smith, senior PwC tax adviser, says Hong Kong is cementing its place as a desirable place to set up a holding company, but could benefit further if it is able to form DTAs with more Asian countries. 'Now, an agreement with Thailand has been signed, this has been highly beneficial for cross-border investment. However, the Philippines, with its high rate of withholding tax, and Korea still stand out as gaps around the region,' he says.
According to Anthony Lau, Deloitte Touche Tohmatsu tax principal, the DTA that Hong Kong has concluded with the mainland has created a favourable platform for multinational companies. 'As a special economic region with a double tax arrangement with the mainland, multinational companies can benefit from basing their operations in Hong Kong where they qualify for double tax advantages. Companies can use Hong Kong as a springboard for their China and regional business activities,' he says.
Tracy Ho, Ernst & Young's tax leader for Hong Kong and Macau, explains that the number of new DTAs signed by Hong Kong has helped to remove any image of the city as a tax haven, which had previously been suggested by some G20 nations. She says Hong Kong's agreements with a growing number of countries should make it easier for companies to base their operations here and avoid the intense scrutiny they would face if they were located in some other jurisdictions.
According to Gary James, a tax partner at Grant Thornton International, Hong Kong's increasing number of DTAs is answering commercial needs.
'The impetus of Hong Kong's DTAs means companies can look at improving the efficiency of placing employees on projects in jurisdictions where Hong Kong has signed tax [agreements],' he says.
'There is also the issue of tax authorities looking closely at the way companies use jurisdictions to benefit from tax structures. This is sometimes in jurisdictions where companies have little business presence. For instance, mainland authorities are taking a closer look at the way companies operate their tax structures, but for those with a base in Hong Kong this should not be a problem because they are usually very active.'