Review of mainland China’s tax rules is needed
A plan that would pull many Hongkongers who work on the mainland into the nation’s tax net has prompted calls for an exemption. Such a move would be good for Hong Kong, the mainland and the Greater Bay Area scheme
A low tax regime remains one advantage Hong Kong has over the mainland. This has not prevented tens of thousands of Hong Kong residents from living and working across the border, because of the way China taxes overseas earnings. A plan to tighten the rules would pull many Hongkongers into the tax net and has prompted local deputies to mainland lawmaking and political advisory bodies to draft a proposal calling for an exemption for them.
Currently anyone who lives and works on the mainland for a year needs to pay tax on income derived overseas, while those who live there for less than a year are taxed only on earnings in the mainland. A planned amendment to the personal income tax law would require Hongkongers who live and make their main income on the mainland for more than 183 days a year to pay tax on other earnings they have made elsewhere.
The proposal by the Ministry of Finance would take effect next year if passed by the National People’s Congress Standing Committee. This could not only dissuade many Hong Kong professionals from working and living on the mainland but has implications for Beijing’s “Greater Bay Area” scheme to link Hong Kong, Macau and nine Guangdong cities into an integrated economic and business hub.
If the scheme is to take off the mainland authorities need to review the tax arrangements. Unlike say 20 years ago, investment and capital are becoming less important Hong Kong contributions to the Greater Bay Area because the area is home to rich cities which are not short of capital. What Hong Kong can provide that will make a difference includes professional know-how and service industries.
So there is an argument that it will be good for the mainland as well as Hong Kong if officials revisit this tax plan. It adds to the strong case for China to cut personal and VAT taxes for a number of reasons – not least to cope with the trade war with the United States. There has long been an argument for tax cuts to boost household purchasing power and the role of consumption in China’s economy, reducing reliance on state-driven investment and exports which create imbalances that fuel conflict with trading partners.