Hong Kong backs US-led global effort to ‘combat tax evasion’, with mainland China also on board
- Special administrative regions of Hong Kong and Macau are among the 130 countries and jurisdictions that have signed onto the plan, which will likely be formalised in the coming months
- New rules would take effect in 2023 and could yield around US$150 billion in additional global tax revenue
Both Hong Kong and mainland China have backed the United States-led initiative to implement a global minimum tax rate, with the city’s financial secretary supporting efforts by the international community to “combat tax evasion”.
Mainland China, as well as its special administrative regions of Hong Kong and Macau, are among the 130 economies that have signed on to the “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy”, which proposes a 15 per cent tax floor and a revenue threshold of €750 million (US$891 million) for multinational companies, with only the shipping industry exempted.
In response to the plan that outlines a sweeping overhaul to the century-old global tax system, Hong Kong Financial Secretary Paul Chan said: “As an international financial and commercial centre, Hong Kong has all along supported international efforts to enhance tax transparency and combat tax evasion, and has adopted corresponding measures.”
[China] would like to join [the global minimum tax initiative] to support multilateralism and inject new momentum into the global economic recovery
The Paris-based Organisation for Economic Cooperation and Development (OECD), which has been leading the international negotiations, announced the tax plan after two days of talks this week. Those 130 economies represent more than 90 per cent of global gross domestic product, and the plan could yield around US$150 billion in additional global tax revenue.
“China supports global tax cooperation, as well as reaching a consensus on a comprehensive and more inclusive scheme,” foreign ministry spokesman Wang Wenbin said at a briefing on Friday. “We would like to join [the global minimum tax initiative] to support multilateralism and inject new momentum into the global economic recovery.”
However, Wang also called for the interests of developing countries to be taken into consideration during negotiations.
Hong Kong and Macau have statutory corporate tax rates of 16.5 per cent and 12 per cent, respectively.
Ding Shuang, chief Greater China economist at Standard Chartered Bank, said that some sectors in Hong Kong may see higher taxes, but that the impact will be offset by other advantages, such as its position as a gateway to mainland China, and also because of the shipping industry exclusion.
“The important thing is that Hong Kong’s major competitors, such as Singapore, will see the same tax floor,” Ding said. “I don’t think investors will take their business elsewhere because of the changes. After all, taxes are only one of the many factors to consider.”
He also said the tax plan is unlikely to have a big impact on Macau, citing its unique status as a casino hub.
Beijing’s decision to participate reflects its intentions to cooperate more in matters of international concern, though analysts have said the tax arrangement will have little material impact on the world’s second-largest economy.
“Tax is only a small part of overall competitiveness,” said Larry Hu, chief China economist of Macquarie Capital, pointing to China’s various advantages, including its relatively cheap labour pool and abundant land.
China’s headline corporate tax rate is set at 25 per cent, but it is lowered to 15 per cent for qualified hi-tech companies and for most businesses in the island province of Hainan, which is the largest free-trade port in China.
It will have little impact and will pose no challenges to [China’s] existing tax regime
Mainland China’s competitiveness was ranked 16th among the 64 economies assessed in an annual report by the Switzerland-based Institute for Management Development. Hong Kong, as an international financial centre, ranked 7th.
Tang Dajie, a researcher with the Beijing-based think tank China Enterprise Institute, said that setting a tax floor is generally in the best interests of the US, and that doing so is largely a politically motivated move because almost all developed economies have higher tax rates.
“It will have little impact and will pose no challenges to [mainland China’s] existing tax regime,” Tang said.
China, which hosts many Fortune Global 500 companies and fosters its own fleet of multinationals, has shown strong interest in fighting tax avoidance. This includes participating in the OECD/G20 Base Erosion and Profit Sharing Project (BEPS), which set up an international framework in 2013 to combat tax avoidance.
As for Hong Kong, Chan said: “Small and medium-sized enterprises in Hong Kong would not be affected by the ‘BEPS 2.0’ package. Insofar as the large [multinational enterprises] to be covered by the package are concerned, the government will endeavour to maintain Hong Kong’s simple, transparent and low tax regime, and minimise their compliance burden.”
Nineteen members of the G20 have agreed to the plan, including Argentina, which previously wanted a higher tax floor. But the stance of the European Union remains unclear. Ireland, an EU member and favoured destination for many multinational firms, given its 12.5 per cent tax rate, did not sign the agreement.
“This package does not eliminate tax competition, as it should not … It is in everyone’s interests that we reach a final agreement among all Inclusive Framework [on BEPS] members as scheduled later this year,” OECD Secretary-General Mathias Cormann said.
US Treasury Secretary Janet Yellen said it was a “historic day for economic diplomacy”.
Kyodo reported that Japanese Finance Minister Taro Aso said at a press conference on Friday that Japan welcomed the global tax deal effort, which he called a “breakthrough approach”.
Technical details of the deal, including the implementation plan, are to be agreed upon by October so that the new rules may be put into place by 2023, according to a statement from countries that backed the agreement. G20 leaders are expected to meet in Rome from October 30-31.
Next week’s meeting of G20 finance ministers in Venice “will be the kick-off to the last stretch” leading up to the Rome gathering, said Lilian Faulhaber, a law professor at Georgetown University who specialises in international tax issues, according to Bloomberg.
“Venice gives them an opportunity to [determine] the areas of work that remain,” Faulhaber was quoted as saying.
Additional reporting by Jun Mai
