On 31 July 2017, the Hong Kong government released the consultation report on measures to counter base erosion and profit shifting (BEPS) by enterprises. Hong Kong indicated its commitment in June 2016 to implementing the BEPS package put forward by the Organisation for Economic Co-operation and Development (OECD). To take forward Hong Kong’s commitment, the Government held a consultation exercise from October 26 to December 31, 2016, to gauge views on the relevant implementation proposals.
The government welcomed the general support from the respondents for the proposed implementation strategy, which focuses on the four minimum standards set by the OECD (i.e. countering harmful tax practices, preventing treaty abuse, imposing a country-by-country reporting requirement and improving the cross-border dispute resolution mechanism) whilst maintaining Hong Kong’s simple and low tax regime. Having regard to the comments received, the authorities will fine-tune certain parameters of the proposals to address stakeholders’ concerns.
The government is pressing ahead with the preparatory work for the legislative exercise, with a view to introducing an amendment bill into the Legislative Council by the end of 2017.
Following a question regarding two tax measures proposed by Chief Executive in her election manifesto, the Secretary for Financial Services and the Treasury has replied on focusing tax relief for small and medium enterprises.
In the 2017-18 Budget, the Financial Secretary announced that a tax policy unit (TPU) would be set up in the Financial Services and the Treasury Bureau. The TPU has three objectives, namely (a) to ensure that their tax regime aligns with international standards; (b) to leverage their tax policy to promote the development of Hong Kong’s economy and industries; and (c) to explore ways to broaden the tax base and increase revenue, with the first priority being to capitalise their tax policy to facilitate the development of Hong Kong’s industries and economy. The TPU has commenced its work from late April this year. The first research topic is the provision of enhanced tax deduction on research and development expenditure. The introduction of a two-tiered profits tax system as proposed by the Chief Executive in her election manifesto is another item on TPU’s agenda and research on it has already been started. Once specific proposals have been drawn up, the Government will consult the stakeholders concerned.
Currently the proposals of the Chief Executive would be to introduce a two-tier profits tax rate system and lower the profits tax rate for the first HKD2m (USD256,000) of profit from the current 16.5 percent to 10 percent; as well as to provide additional tax deductions for business spending on research and development activities.
Revenue Minister has signed a new tax protocol between New Zealand and Hong Kong on 28th June 2017. The protocol updates the existing double tax agreement between New Zealand and Hong Kong, to allow full exchange of information on tax matters between the two jurisdictions. Once in force, the updated double tax treaty will require both Hong Kong and New Zealand to automatically exchange tax information with each other, in line with the G20 and OECD Automatic Exchange of Information global standard.
New Zealand’s existing double tax agreement with Hong Kong was signed in 2010 but was limited to exchanges of information on request. The Second Protocol will come into force once both signatories have completed their respective legal requirements.
Hong Kong has signed an agreement with New Zealand for conducting automatic exchange of financial account information in tax matters (AEOI), a Government spokesman said on July 14, 2017.
The spokesman added that they have been seeking to expand Hong Kong’s AEOI network with their tax treaty partners. Including the agreement with New Zealand, Hong Kong now has 14 AEOI partners. The others are Belgium, Canada, Guernsey, Indonesia, Ireland, Italy, Japan, Korea, Mexico, the Netherlands, Portugal, South Africa and the United Kingdom.
The spokesman added also that the Government plans to extend the application of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters to Hong Kong. An amendment bill will be introduced into the Legislative Council by late 2017.
The Inland Revenue Department (IRD) plans to launch an Automatic Exchange of Information (AEOI) portal from 3 July 2017, according to a spokesman for the IRD. The portal would be used for financial institutions to furnish notifications and file returns in relation to the reporting of financial account information for automatic exchange of financial account information (AEOI) purposes.
Financial institutions have to register under the AEOI Portal in order to use the online services. The users are required to use their e-Cert (Organisational) with AEOI Functions for the purposes of authentication so as to ensure confidentiality of the data being transmitted.
A financial institution maintaining reportable accounts on or before 3 July 2017 is required to register under the AEOI Portal and submit a notification of commencement of maintaining reportable accounts no later than 3 October 2017. Financial institutions who commence to maintain any reportable accounts after 3 July 2017 should submit the required notifications through the AEOI Portal within three months from the commencement of maintaining such accounts.
The IRD has organised seminars to familiarize financial institutions with the operation of the AEOI Portal. The Portal can be accessed through https://aeoi.ird.gov.hk from 3 July 2017.
Three orders made by the Chief Executive in Council under the Inland Revenue Ordinance to implement the Comprehensive Agreements for the Avoidance of Double Taxation (CDTAs) with Latvia, Belarus and Pakistan respectively were gazetted on June 30 2017.
The CDTAs ensure that investors will not have to pay tax twice on a single source of income. The CDTAs will bring tax savings and a greater certainty on taxation liabilities for investors from the respective treaty partner countries when they engage in trade and investment activities with Hong Kong and vice versa.
The three orders will be tabled at the Legislative Council on July 5 2017 for negative vetting. The CDTAs will enter into force after both Hong Kong and the treaty partners have completed their ratification procedures. Hong Kong signed the CDTAs with Latvia, Belarus and Pakistan in April 2016, January 2017 and February 2017 respectively.
On 23 June 2017 the Hong Kong SAR Government published in the Gazette the Inland Revenue (Amendment) (No. 4) Bill 2017 to implement the 2017-18 Budget initiative of extending profits tax exemption to privately offered open-ended fund companies (OFCs) with their central management and control exercised in Hong Kong.
The Bill seeks to create a level playing field for all kinds of OFCs by allowing onshore privately offered funds, like the offshore ones, to enjoy profits tax exemption. Hong Kong considers that the Bill would be conducive to enhancing Hong Kong’s competitiveness in respect of the domiciliation of privately offered funds in the form of an OFC, thereby generating demand for services along the whole fund service chain. This would help strengthen Hong Kong’s position as an international asset management centre and foster the further development of the financial services industry.
The legal framework for the OFC structure was enacted by the Legislative Council (LegCo) in June 2016 by way of the Securities and Futures (Amendment) Ordinance 2016. This is a key initiative to help diversify Hong Kong’s fund domiciliation platform and build up fund manufacturing capabilities. An OFC is a collective investment scheme with variable capital set up in the form of a company, but with the flexibility to create and cancel shares for investors’ subscription and redemption in the funds, which is currently not enjoyed by conventional companies. Also, OFCs will not be bound by restrictions on distribution out of capital applicable to conventional companies, and instead may distribute out of capital subject to solvency and disclosure requirements. The Bill aims to complement the OFC initiative by providing a more facilitating tax environment for OFCs.
The Bill was introduced into LegCo on 28 June 2017.