THE Government is to seek Beijing's approval to formulate tax treaties with major trading partners, in a move that could save Hongkong companies billions of dollars a year. Government sources said they were drafting proposals to be put to the Executive Council, and would seek permission from China through the Joint Liaison Group. The move could slash company tax bills abroad by up to 30 per cent - one well-known toy company alone would net US$24 million from three years' cumulative earnings under a treaty with the US. Tax specialist Philip Marcovici of Baker and McKenzie, who has long been pushing for the treaties, said Hongkong groups engaged in business overseas would rake in substantial savings if the move was passed. As an example, he compared Standard Chartered Bank - operating in Hongkong as a branch of a British company, and so benefiting from a tax treaty between Britain and the US - with Hang Seng Bank. Interest payments from a US borrower to Standard Chartered are totally free of withholding tax, courtesy of the US-UK tax treaty. But in the absence of a similar treaty for Hongkong, Hang Seng Bank sees 30 per cent of its interest payments from US borrowers channelled into the US Treasury. Mr Marcovici said there would also be a tax windfall for Hongkong companies making exploratory trips abroad to sound out business opportunities. Under US tax rules, this research activity could result in the company being taxed in the US. But with a treaty in place, tax would only be levied if there was a permanent set-up in the country. Vitasoy International finance and administration director John Lau said Hongkong's refusal in the past to develop treaties with relevant countries stood at odds with its role as a vibrant city playing host to numerous transactions on a daily basis. He said: ''If Hongkong has efficient tax treaties with the relevant trade partners, there is no need for companies to go and spend money in other countries in a bid to reduce their tax bills. ''In the longer term this should help Hongkong because a lot of trade and transactions have taken place between Hongkong and a number of leading trading partners in the world. ''The fact that so far there have not been any tax treaties is surprising.'' Certain very specific treaties exist - such as a US deal on shipping profits - and more of this type of treaty will be developed as a first step. Afterwards, plans for more comprehensive treaties will be drafted. A Government source said: ''We are looking at it, but it is still premature to talk to other people because we have to talk to China first. ''We have to consider comprehensive tax treaties, because if other countries approach us we have to consider proposals carefully and respond. Canada has already approached us but we have decided nothing. ''We are still considering all these benefits, pros and cons.'' China itself has negotiated agreements with more than 20 countries including Canada, Japan, Singapore, Thailand, Britain and the US. One well-known Hongkong toymaker, which relies on the US for 70 per cent of its sales, said: ''Because we are a Hongkong company, whatever we can get from the US benefits Hongkong shareholders.'' VTech group finance director William Ho Mok-lam welcomed the move on developing direct Hongkong treaties as an obvious help to companies with international operations. Some 60 per cent of the firm's sales are derived from the US. In the past, critics of treaties have pointed to the exchange of information that would go hand-in-hand with tax benefits, saying these could adversely affect Hongkong's attractiveness to international businesses, and the extra workload on the Inland Revenue Department. But Mr James Arkoosh, US tax partner with KPMG Peat Marwick, said the exchange of data agreements was generally limited and seldom went beyond information the Government already had. He said: ''Our proposal is that exchange of data is negotiated between governments and could be limited. You only have to look at the Sino-US exchange agreement - a very limited provision which most people would not find at all prohibitive.'' Tax specialists also said the agreements would boost revenue for the territory. Hongkong companies' favourite vehicle for benefiting from tax treaties - setting up shell companies in the Netherlands, where an attractive deal with the US is in place - was last month hit by a series of tough restrictions, ruling out its viability for many former users. The restrictions, which will not come into effect until the end of the year at the earliest, have already prompted companies such as Wharf (Holdings) to set up teams to look into the issue.
