HongKong Business

HK creating clearer, more certain bilateral tax environments

By Joy Li (HK Edition)
Updated: 2010-06-24 07:03

Hong Kong will be even more competitive by taking more concrete actions on tax information exchange, KPMG high-level tax professionals tell Joy Li.

On Tuesday, Hong Kong and the UK signed the comprehensive agreement for the avoidance of double taxation (CDTA), the seventh straight pact in three months, compared with only five in 12 years since the handover. Despite still having a long way to go, the city is prodding the issues in the right direction to boost transparency and certitude, the key elements in attracting business from a tax angle.

"Businesses don't mind paying tax, as long as they are told clearly how much they are required to pay," said Ayesha Macpherson, Head of Tax at KPMG in Hong Kong, in an exclusive interview with China Daily.

Calls for further lowering the headline corporate tax rate to below 15 percent have been gathering steam. While Hong Kong levies remain at the low end of corporate tax rates, the region can anticipate rate competition to resume as the recession enters its terminal phase. Singapore, often cited as a rival, has been aggressively closing the gap by reducing its rate from 26 percent to 17 percent over the past decade, momentum posing a challenge to Hong Kong's attractiveness as a business destination.

However, in this seesawing scenario, there is currently limited room for change.

"Hong Kong's 16.5 percent rate is already very competitive, because other countries are striving for the magic number of 25 percent," Loughlin Hickey, KPMG global head of tax, told China Daily.

"I myself agree with 15 percent as a benchmark for Hong Kong; it can be done in the not too distant future. For the time being, the government should keep an eye on it because of pressure from other countries' rate cuts," said Macpherson.

Apart from debate over the tax rate, actions to shore up certainty in its tax environment, by upholding international standards of information exchange (and thereby signing up more CDTAs), lend real clout to Hong Kong.

In March this year, after tough debate, the Legislative Council passed the legislative proposal to adopt the latest international standard on exchange of tax information, a decisive move leading to a spate of CDTAs signed and a cue to go ahead.

The CDTA network enables clarification and assurance that Hong Kong residents and companies will not be taxed by two jurisdictions for the same income. For example, the latest agreement signed with the UK states that Hong Kong residents receiving royalties from the UK are subject to a 3 percent tax cap and an exemption from tax on interest. Prior to the agreement, tax payers were saddled with a 20 percent rate for each source of income.

The implication is far-flung when it comes to cementing Hong Kong's status as an international business hub.

"By building up a CDTA network, Hong Kong is in a good position to act as a springboard for mainland companies now eager to invest globally," said Macpherson.

"Hong Kong sends a very strong signal to the world, the true benefit to business is to show that the city is a good place to invest," Hickey said.

At the G20 summit held last April, threats were made to label Hong Kong a tax haven on a blacklist associated with secretive tax regimes. In response, the city government vigorously defended itself as transparent. Both Hickey and Macpherson agreed that Hong Kong has not been a tax heaven.

Hickey explained that it is a "legitimate form of competition" to have low tax rates in the first place, to which he added that, Hong Kong has won plaudits for cooperating with international standards of tax information exchange, wherein lie the real benefits for businesses.

(HK Edition 06/24/2010 page3)