Tax specialist warns on closing loophole
THE inflow of technology to Hongkong may slow down with the closure of a loophole in the taxation system, a tax specialist has warned.
In Wednesday's Budget, the level of assessable profit on royalties for the use of intellectual property paid by Hongkong companies to their overseas associates was raised from 10 per cent to 100 per cent.
The Government believes this will close a loophole by which in the past some local companies have reduced their tax liabilities by transferring ownership of intellectual property to their overseas associates.
Ms Petrina Tam, a partner with Price Waterhouse, said yesterday the legislation had closed the loophole but at a very high price.
''The legislation will increase the costs of local companies developing a product or a skill which carries a trademark or royalties if their research and development divisions are outside Hongkong,'' she said.
In the long run, the legislation would discourage these companies from bringing technology and other kinds of intellectual property, such as new products, into the territory.
Ms Tam said there were companies setting up overseas associates to use intellectual property for reasons other than tax avoidance.
She said one reason was that some countries provided a better environment for research and development than Hongkong.
''As such, I believe the legislation is over-killing and will affect some ordinary commercial business transactions,'' she said.
''I should have hoped that a more thorough and detailed study would have been carried out instead of this one-off measure.'' Hongkong's effective withholding tax rate on royalties on these associates will be lifted to 17.5 per cent rather than the current 1.75 per cent, after taking into account the local corporate tax of 17.5 per cent.
In most countries, the effective withholding tax rate on royalties is lower than the corporate tax rate.
Ms Tam said: ''The rate for Hongkong is now 17.5 per cent, the same as the local corporate tax rate.'' This compared with Malaysia, where the effective withholding tax rate on royalties was 15 per cent, far lower than the country's corporate tax rate of 35 per cent.
