Taxation Reform
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Hong Kong Taxation Reform From an Offshore Financial Center Perspective Group 8 Interim Deliverable • Year 3 Surveying Studio • 11 November 2009
HK as Asia’s Offshore Financial Center • URL: http://hkofc.blogspot.com/ !
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
PART I: Current Situation of Hong Kong Taxation Capital Gains Tax Unlike other jurisdictions, no capital gains tax is imposed on any companies in Hong Kong SAR. This provides a strong base for the financial development in terms of taxation benefits. It is no doubt that for a o!shore financial centre the policy should retain in order to maintain the competitiveness of the business environment.1
Stamp Duty Fee Stamp duty is payable for any sales, transfer and lease of properties and the transaction of marketable securities like stocks and derivatives. This is the major taxation to be focused on for o!shore financial transactions, hence the trades of commodities and futures. No stamp duty will be charged for non-residential properties. We should note that, which will be discussed in the later parts, stamp duty fee is not very common in other o!shore financial centers in other part of the world. To be competitive, a policy reformed about the stamp duty should be made. Lam (2000) suggests that the stamp duty policy variations mainly focused on the property market, which is the major industry in Hong Kong, compared to Singapore. From the general point of view of the public, the higher the stamp duty, the lower transaction volume of the securities market will be. According to Umlauf (1993), transaction tax (i.e. the stamp duty rate in Hong Kong) imposition will reduce the security market turnover. However, according to Hu (1998), the changes of the transaction tax rate will only a!ect the stock prices in the market, but not the volatility and turnover, if the capital market is highly regulated. The author therefore suggested that any policy adjustment on stamp duty fee requires considerations on the migration possibility in trading. Hence, the suggested future policy reform on stamp duty should focus on the regulation itself, but not the stamp duty rate.2
1
Low-tax.net: www.lowtax.com
2
Lam, N. M. K. (2000). "Government Intervention In The Economy: A Comparative Analysis of Singapore and Hong Kong." Public Administration and Development 20: 397-421. PAGE 1 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
Property Tax All property owners shall not be subject to this tax unless he or she has received a consideration, for example, a rental income. The property tax shall be computed on the net assessable value at the standard rate. The property tax rate from the financial year 2008/09 onwards is 15% per year.3 From the report of property consultant, Jones Lang LaSalle, the common practice in Hong Kong o"ce market is that the property tax is payable fully by the landlord but not equally share among him and the tenants. Sales of grade A o"ce properties is also not the major transactions type of the market in Hong Kong. Most of the grade A o"ce buildings in CBDs are occupied by major landlords. Foreign investors who would like to set up their regional o"ces in Hong Kong will probably rent the spaces they needed instead of purchase. In other words, the property tax system in Hong Kong won’t a!ect the development of o!shore financial services much.
Profit Tax(Corporate tax/Income tax) Profit tax is one of three separate heads imposed under tax system in Hong Kong, the other two are salaries tax on income from pensions and employment, property tax on rental income. Profit tax mainly focuses on profits of a trade, business or profession.4 The fundamental to the taxation of profits in Hong Kong applies the territorial concept/rules. It means that only those profits which arise in or are derived from Hong Kong are liable to profit tax in Hong Kong. (tax on Hong Kong sourced income) The profit tax is currently at the rate of 16.5% of the 2008/09 year of assessment. However, there are certain situations that profit tax is exempted in Hong Kong 5: 1. dividends received from a corporation which is subject to Hong Kong Profits Tax; 2. amounts already included in the assessable profits of other persons chargeable to Profits Tax; 3. Interest on Tax Reserve Certificates; 4. interest on, and any profit made in respect of a bond issued under the Loans Ordinance (Cap. 61) or the Loans (Government Bonds) Ordinance (Cap. 64), or in respect of an Exchange Fund debt instrument or in respect of a Hong Kong dollar-denominated multilateral agency debt instrument; 5. interest income and trading profits derived from long term debt instruments; and 6. sums received or accrued in respect of a specified investment scheme by or to the person as:
3
Inland Revenue Department: http://www.ird.gov.hk/eng/tax/ind_tra.htm
4
Survey Report of Jones Lang LaSalle, 2007
5
Source: Low-tax.net: www.lowtax.com PAGE 2 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
• a person chargeable to Profits Tax in respect of a mutual fund, unit trust or similar investment
scheme that is authorized as a collective investment scheme under section 104 of the Securities and Futures Ordinance (Cap. 571); or • a person chargeable to Profits Tax in respect of a mutual fund, unit trust or similar investment
scheme where the Commissioner is satisfied that the mutual fund, unit trust or investment scheme is a bona fide widely held investment scheme which complies with the requirements of a supervisory authority within an acceptable regulatory regime.
Withholding Tax Generally, there is no withholding tax in Hong Kong. But under certain circumstance that the payment paid by a Hong Kong company to its foreign associate (subsidiary or holding company) is deemed to be treated as Hong Kong source income, the company should withhold the tax for Hong Kong taxation. For instance, when a Hong Kong entity pays royalties for the use of intellectual property to its own o!shore licensing a"liate, then tax is due of 10% of 17.5% = 1.75% and this must be withheld by the Hong Kong paying company.6
Taxation for Funds & Trusts Normally, funds and trusts are treated like other entities, which means they are subject to Hong Kong profit tax (currently at the rate of 16.5% of the 2008/09 year of assessment) if their sourced profits are attributable to a business carried in Hong Kong. However, there are certain statutory exemptions from profit tax for such funds which are qualified by the government. Actually, there are two specific exemptions available to funds which, subject to the relevant conditions being satisfied, operate to exempt certain or all of the fund`s profits from tax in Hong Kong. For authorized or regulated funds exemptions:
If a fund is: • a mutual fund or unit trust authorized under the Securities and Futures Ordinance; or • a mutual fund, unit trust, or similar collective investment vehicle which the Commissioner of
Inland Revenue is satisfied is bona fide, widely held, and complies with the requirements of a supervisory authority within an acceptable regulatory regime. Therefore, all profits of the funds will be exempted from profit tax to the extent that the profits arise from investment activities which are in accordance with the fund`s constituent documents and the requirements of the regulatory regime under which it operates.7
6
Source: The example is applied by LOWTAX.NET
7 KPMG International fund and fund management survey database for Hong Kong
PAGE 3 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
For offshore funds exemption:
It was introduced in March 2006 to apply to a broader category of o!shore funds. Generally, an o!shore fund is exempted from Hong Kong profits tax if the fund is a non-resident person ( a company, individual, partnership, or trust) and derives its profits from certain qualifying transactions carried out through or arranged by specified persons. If profits of such o!shore funds are not from certain qualifying transactions or from transactions incidental to these qualifying transactions, the profits should still be subject to profit tax in Hong Kong. To define non-resident person out of resident person is crucial to apply exemption provision. According to KPMG Taxation of international executives Hong Kong, “the definition depends on where the relevant entity exercises its central management and control. The Inland Revenue Department has indicated that the central management and control requirement refers to the highest level of control of the entity concerned rather than day-to-day management of the entity.” Moreover, although other funds and trusts are not eligible to be exempted from profit tax in Hong Kong, they are generally not subject to tax in respect of dividends, capital gain, certain interest income, and o!shore sourced income.
Taxation for Holding Companies Holding companies are often used within multinational groups to centralize the management of the participations held by the group. It usually refers to a company which does not produce goods or services itself, rather its only purpose is owning shares of other companies. Therefore, quite a few jurisdictions around the globe provide taxation benefit to attract the setting up of holding companies, like Luxembourg, Bermuda, etc. There is no some specific profit tax treatment for holding companies in Hong Kong. They are generally treated as normal business with no di!erence. If they conduct business and generate income with the region of Hong Kong, they should be subject to profit tax. (currently at the rate of 16.5% of the 2008/09 year of assessment) 8.
8
KPMG International fund and fund management survey database for Hong Kong PAGE 4 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
PART II: O!shore Financial Center Explained An O!shore Financial Center (OFC) can be broadly defined as a location where funds borrowed from nonresidents and lent to other nonresidents through the intermediation of banks and other financial institutions. The growth of OFCs has been prompted mainly by the needs and demands of multinational business. To be specific, companies operating in various countries require:9 I.
funding sources in di!erent currencies,
II. outlets for temporarily idle funds III. access to di!erent kinds of credit facilities IV. means for the transfer monies across international frontiers As a result, taxation treatments is among the most important factors influencing the way international business is transacted. This also explains the phenomenon that most OFCs are characterized as “tax haven”.
Tax Haven Defined This term is broadly used to describe di!erent OFCs around the globe. However, there is not yet any exact definition of the term. Casually speaking, tax haven can be regarded as “a place where foreigners may receive income or own assets without having to pay for it”.10 One of the most rapidly growing type of tax haven operation is that of shifting business profits from high-tax jurisdictions to tax haven ones. The profit shifting transactions are usually carried out by large conglomerates through tax haven subsidiaries, using sophisticated approaches to diminish the tax base in high-tax countries while increasing it in tax haven places. The other dominant type of activity carried out in tax haven is by the financial sector. The financial sector usually comprises a large number of banks and trust companies, most of which are branches and subsidiaries of foreign-owned financial institutions. The reason of their presence in OFCs can be attributed as the following: I.
to shelter foreign passive investment income
II. to hold deposits for foreign investors III. to provide administrative facilities for corporate subsidiaries 9
Henry C. Walich, Offshore Financial Centers, April 1979
10
Lan McCarthy, Offshore Banking Centers, Benefits and Costs PAGE 5 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
IV. to proceed Euro-currency business through their “shell branches”
Tax haven advantages Being tax havens could potentially bring various benefits to OFCs. One of the main advantages is the possibility of achieving a higher employment level, which is particularly attractive to jurisdictions with a narrow resource base like Hong Kong. Especially, the financial institutions that are attracted to set up within OFCs could generate employment opportunities and additional demand for services. On the other hand, construction would be boosted, principally o"ce buildings. In addition, tourism would be another sector that could be stimulated, as meetings of directors in the jurisdiction might be a requirement for incorporation. Finally, the tax haven sector is a course of revenue for the government. There will always be some form of tax or fee for which foreign investors will be liable, no matter how the tax system will be like. For Singapore banks, for example, profits from domestic sources are taxable while income from foreign sources is exempt. Also, indirect taxes such as customs duties and sales taxes are fully taxable in most OFCs.
Taxation advantages in OFCs Low taxation is perhaps the primary reason attracting institutions. Specifically, the advantages o!ered by OFCs can be categorized as income tax advantage, absence of estate, inheritance and gift tax, bilateral tax treaties, and the existence of features in the tax systems of developed countries that allow taxpayers to take advantage of the benefits o!ered of OFCs. Taxes and levies on o!shore business are virtually nonexistent in OFCs, in “marked contrast” to the situation in alternative locations. The taxation treaties in major OFCs around the globe can be summarized as Table 1. Almost none of these OFCs impose minimum reserve requirement; None of them enforces withholding taxes on internal income; And they impose very limited profit tax, if any at all.
Jurisdiction
Taxes & levies
Annual license fee
Min. reserve requirement
Anguilla
None
EC$1,350
None
Bahamas
None
US$300-45,000
None
Bahrain
None
US$25,000
None
Cayman Islands
None
C$5,000-15,000
None
PAGE 6 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
Jurisdiction
Taxes & levies
!
SURVEYING STUDIO III
Annual license fee
Min. reserve requirement
Hong Kong
10% withholding tax on interest paid (proposed 17% offshore profit tax)
None
None
Jersey
£300 per annum for corporate tax companies
None
None
Lebanon
None
None
None
Luxembourg
40% profit tax 40% municipal business tax 30% liquidity ratio
None
None
Netherlands Antilles
3-6% profit tax
None
None
New Hebrides
None
$A 1,000
None
Panama
None
None
None
Philippines
5% profit tax (on offshore to offshore transactions) 10% profit tax (offshore to onshore)
US$20,000
None
Seychelles
None
US$20,000
None
Singapore
10% profit tax (on offshore operations)
S$50,000
None
United Arab Emirates
None
None
None
Table 1 Taxation treaties in major OFCs around the globe 11
11
Mika Casnegra de Jantscher, Tax Havens Explained PAGE 7 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
PART III: Proposal for Hong Kong’s Taxation Reform Double taxation Treaty The Tax in Hong Kong is subject to territorial rules(or residence rules), which means only those profits which arise in or are derived from Hong Kong are liable to tax in Hong Kong. This is sometimes quite di!erent from the tax rules of other jurisdictions, for example, United States, which levies its tax based on the nationality of American people. To avoid the conflicts of interest in levying taxes with other jurisdictions, and also to lower the double tax burden of foreign investors in Hong Kong thus improving the investment environment in Hong Kong, double tax agreement will play an important role in such situations. According to KPMG International fund and fund management survey database for Hong Kong, Hong Kong has a comprehensive double tax agreement with Belgium, Thailand, and, more recently, with Mainland China, Vietnam, and Luxembourg. The Hong Kong government is presently in the process of negotiating a double tax agreement with Italy and the Netherlands.” For Hong Kong to be a competitive Asian o!shore financial center, we suggest the HKSAR government to speed up the negotiation process with other world famous financial jurisdictions in achieving more double taxation treaties as early as possible. A complete and comprehensive double taxation treatment system will attract investors from di!erent jurisdictions all over the world into Hong Kong with little concern about taxation problem.
Exemption of holding company, funds and stamp duty Nowadays, holding companies, funds and trusts are treated as normal business and similarly subject to profit tax in Hong Kong. As it is always the case, other major o!shore financial centers in the world are also the center of registration of holding companies and funds. If Hong Kong prefers to take up these roles in future, it is better to consider a special and comprehensive taxation treatment for holding companies and funds. We suggest HKSAR government to simply exempt the tax for holding companies and funds in Hong Kong to give better incentives for foreign investors to register their holding companies here and establish o!shore funds in Hong Kong as well. The loss of these exemptions is relatively small, and it could be o!set by other tax increments from the prosperity of Hong Kong as an o!shore financial center. As discussed in part 1, stamp duty is the major taxation related to the transactions of commodities in the Hong Kong Exchange market. According to the annual report 2007-08 of the Inland Revenue Department, during the peak periods, i.e. the so-called economic crest like in 2008, where the PAGE 8 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
transaction volume per day were huge, stamp duty would be the second major tax income source (concluded for 25.7% of total tax incomes) of the HKSAR government. On the other hand, in a complicated regulatory environment like Hong Kong 12, changing the stamp duty rate will greatly a!ected the transaction volume as suggested by Umlauf (1993). Therefore, providing stamp duty fee exemption would be the most appropriate measure to increase the investment incentive to the foreign funds and trusts, rather than decreasing the stamp duty rate. The details of the fee exemption should be discussed further in order to strike a balance between of the resulting benefits and induced implications.
References 1. KPMG International fund and fund management survey database for Hong Kong 2. Inland Revenue Department Annual Reports: http://www.ird.gov.hk/eng/ppr/are.htm 3. Lam, N. M. K. (2000). "Government Intervention In The Economy: A Comparative Analysis of Singapore and Hong Kong." Public Administration and Development 20: 397-421. 4. Hu, S.Y. (1998). “The e!ects of the stock transaction tax on the stock market – Experiences from Asian markets.” Pacific-Basin Finance Journal 6(3-4): 347-364. 5. Umlauf, S.R. (1993). “Transaction taxes and stock market behavior: the Swedish experience.” Journal of Financial Economics 33: 227–240. 6. Low-tax.net: www.lowtax.com
12
Hong Kongʼs financial market is regulated by the Hong Kong Monetary Authority (HKMA), Securities and Futures Commission (SFC), Hong Kong Insurance Authority (HKIA) and Hong Kong Association of Banks (HKAB) with different sets of regulations. PAGE 9 OF 9!
GROUP 8
HK as Asia’s Offshore Financial Center • URL: http://hkofc.blogspot.com/ !
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
PART I: Current Situation of Hong Kong Taxation Capital Gains Tax Unlike other jurisdictions, no capital gains tax is imposed on any companies in Hong Kong SAR. This provides a strong base for the financial development in terms of taxation benefits. It is no doubt that for a o!shore financial centre the policy should retain in order to maintain the competitiveness of the business environment.1
Stamp Duty Fee Stamp duty is payable for any sales, transfer and lease of properties and the transaction of marketable securities like stocks and derivatives. This is the major taxation to be focused on for o!shore financial transactions, hence the trades of commodities and futures. No stamp duty will be charged for non-residential properties. We should note that, which will be discussed in the later parts, stamp duty fee is not very common in other o!shore financial centers in other part of the world. To be competitive, a policy reformed about the stamp duty should be made. Lam (2000) suggests that the stamp duty policy variations mainly focused on the property market, which is the major industry in Hong Kong, compared to Singapore. From the general point of view of the public, the higher the stamp duty, the lower transaction volume of the securities market will be. According to Umlauf (1993), transaction tax (i.e. the stamp duty rate in Hong Kong) imposition will reduce the security market turnover. However, according to Hu (1998), the changes of the transaction tax rate will only a!ect the stock prices in the market, but not the volatility and turnover, if the capital market is highly regulated. The author therefore suggested that any policy adjustment on stamp duty fee requires considerations on the migration possibility in trading. Hence, the suggested future policy reform on stamp duty should focus on the regulation itself, but not the stamp duty rate.2
1
Low-tax.net: www.lowtax.com
2
Lam, N. M. K. (2000). "Government Intervention In The Economy: A Comparative Analysis of Singapore and Hong Kong." Public Administration and Development 20: 397-421. PAGE 1 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
Property Tax All property owners shall not be subject to this tax unless he or she has received a consideration, for example, a rental income. The property tax shall be computed on the net assessable value at the standard rate. The property tax rate from the financial year 2008/09 onwards is 15% per year.3 From the report of property consultant, Jones Lang LaSalle, the common practice in Hong Kong o"ce market is that the property tax is payable fully by the landlord but not equally share among him and the tenants. Sales of grade A o"ce properties is also not the major transactions type of the market in Hong Kong. Most of the grade A o"ce buildings in CBDs are occupied by major landlords. Foreign investors who would like to set up their regional o"ces in Hong Kong will probably rent the spaces they needed instead of purchase. In other words, the property tax system in Hong Kong won’t a!ect the development of o!shore financial services much.
Profit Tax(Corporate tax/Income tax) Profit tax is one of three separate heads imposed under tax system in Hong Kong, the other two are salaries tax on income from pensions and employment, property tax on rental income. Profit tax mainly focuses on profits of a trade, business or profession.4 The fundamental to the taxation of profits in Hong Kong applies the territorial concept/rules. It means that only those profits which arise in or are derived from Hong Kong are liable to profit tax in Hong Kong. (tax on Hong Kong sourced income) The profit tax is currently at the rate of 16.5% of the 2008/09 year of assessment. However, there are certain situations that profit tax is exempted in Hong Kong 5: 1. dividends received from a corporation which is subject to Hong Kong Profits Tax; 2. amounts already included in the assessable profits of other persons chargeable to Profits Tax; 3. Interest on Tax Reserve Certificates; 4. interest on, and any profit made in respect of a bond issued under the Loans Ordinance (Cap. 61) or the Loans (Government Bonds) Ordinance (Cap. 64), or in respect of an Exchange Fund debt instrument or in respect of a Hong Kong dollar-denominated multilateral agency debt instrument; 5. interest income and trading profits derived from long term debt instruments; and 6. sums received or accrued in respect of a specified investment scheme by or to the person as:
3
Inland Revenue Department: http://www.ird.gov.hk/eng/tax/ind_tra.htm
4
Survey Report of Jones Lang LaSalle, 2007
5
Source: Low-tax.net: www.lowtax.com PAGE 2 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
• a person chargeable to Profits Tax in respect of a mutual fund, unit trust or similar investment
scheme that is authorized as a collective investment scheme under section 104 of the Securities and Futures Ordinance (Cap. 571); or • a person chargeable to Profits Tax in respect of a mutual fund, unit trust or similar investment
scheme where the Commissioner is satisfied that the mutual fund, unit trust or investment scheme is a bona fide widely held investment scheme which complies with the requirements of a supervisory authority within an acceptable regulatory regime.
Withholding Tax Generally, there is no withholding tax in Hong Kong. But under certain circumstance that the payment paid by a Hong Kong company to its foreign associate (subsidiary or holding company) is deemed to be treated as Hong Kong source income, the company should withhold the tax for Hong Kong taxation. For instance, when a Hong Kong entity pays royalties for the use of intellectual property to its own o!shore licensing a"liate, then tax is due of 10% of 17.5% = 1.75% and this must be withheld by the Hong Kong paying company.6
Taxation for Funds & Trusts Normally, funds and trusts are treated like other entities, which means they are subject to Hong Kong profit tax (currently at the rate of 16.5% of the 2008/09 year of assessment) if their sourced profits are attributable to a business carried in Hong Kong. However, there are certain statutory exemptions from profit tax for such funds which are qualified by the government. Actually, there are two specific exemptions available to funds which, subject to the relevant conditions being satisfied, operate to exempt certain or all of the fund`s profits from tax in Hong Kong. For authorized or regulated funds exemptions:
If a fund is: • a mutual fund or unit trust authorized under the Securities and Futures Ordinance; or • a mutual fund, unit trust, or similar collective investment vehicle which the Commissioner of
Inland Revenue is satisfied is bona fide, widely held, and complies with the requirements of a supervisory authority within an acceptable regulatory regime. Therefore, all profits of the funds will be exempted from profit tax to the extent that the profits arise from investment activities which are in accordance with the fund`s constituent documents and the requirements of the regulatory regime under which it operates.7
6
Source: The example is applied by LOWTAX.NET
7 KPMG International fund and fund management survey database for Hong Kong
PAGE 3 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
For offshore funds exemption:
It was introduced in March 2006 to apply to a broader category of o!shore funds. Generally, an o!shore fund is exempted from Hong Kong profits tax if the fund is a non-resident person ( a company, individual, partnership, or trust) and derives its profits from certain qualifying transactions carried out through or arranged by specified persons. If profits of such o!shore funds are not from certain qualifying transactions or from transactions incidental to these qualifying transactions, the profits should still be subject to profit tax in Hong Kong. To define non-resident person out of resident person is crucial to apply exemption provision. According to KPMG Taxation of international executives Hong Kong, “the definition depends on where the relevant entity exercises its central management and control. The Inland Revenue Department has indicated that the central management and control requirement refers to the highest level of control of the entity concerned rather than day-to-day management of the entity.” Moreover, although other funds and trusts are not eligible to be exempted from profit tax in Hong Kong, they are generally not subject to tax in respect of dividends, capital gain, certain interest income, and o!shore sourced income.
Taxation for Holding Companies Holding companies are often used within multinational groups to centralize the management of the participations held by the group. It usually refers to a company which does not produce goods or services itself, rather its only purpose is owning shares of other companies. Therefore, quite a few jurisdictions around the globe provide taxation benefit to attract the setting up of holding companies, like Luxembourg, Bermuda, etc. There is no some specific profit tax treatment for holding companies in Hong Kong. They are generally treated as normal business with no di!erence. If they conduct business and generate income with the region of Hong Kong, they should be subject to profit tax. (currently at the rate of 16.5% of the 2008/09 year of assessment) 8.
8
KPMG International fund and fund management survey database for Hong Kong PAGE 4 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
PART II: O!shore Financial Center Explained An O!shore Financial Center (OFC) can be broadly defined as a location where funds borrowed from nonresidents and lent to other nonresidents through the intermediation of banks and other financial institutions. The growth of OFCs has been prompted mainly by the needs and demands of multinational business. To be specific, companies operating in various countries require:9 I.
funding sources in di!erent currencies,
II. outlets for temporarily idle funds III. access to di!erent kinds of credit facilities IV. means for the transfer monies across international frontiers As a result, taxation treatments is among the most important factors influencing the way international business is transacted. This also explains the phenomenon that most OFCs are characterized as “tax haven”.
Tax Haven Defined This term is broadly used to describe di!erent OFCs around the globe. However, there is not yet any exact definition of the term. Casually speaking, tax haven can be regarded as “a place where foreigners may receive income or own assets without having to pay for it”.10 One of the most rapidly growing type of tax haven operation is that of shifting business profits from high-tax jurisdictions to tax haven ones. The profit shifting transactions are usually carried out by large conglomerates through tax haven subsidiaries, using sophisticated approaches to diminish the tax base in high-tax countries while increasing it in tax haven places. The other dominant type of activity carried out in tax haven is by the financial sector. The financial sector usually comprises a large number of banks and trust companies, most of which are branches and subsidiaries of foreign-owned financial institutions. The reason of their presence in OFCs can be attributed as the following: I.
to shelter foreign passive investment income
II. to hold deposits for foreign investors III. to provide administrative facilities for corporate subsidiaries 9
Henry C. Walich, Offshore Financial Centers, April 1979
10
Lan McCarthy, Offshore Banking Centers, Benefits and Costs PAGE 5 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
!
SURVEYING STUDIO III
IV. to proceed Euro-currency business through their “shell branches”
Tax haven advantages Being tax havens could potentially bring various benefits to OFCs. One of the main advantages is the possibility of achieving a higher employment level, which is particularly attractive to jurisdictions with a narrow resource base like Hong Kong. Especially, the financial institutions that are attracted to set up within OFCs could generate employment opportunities and additional demand for services. On the other hand, construction would be boosted, principally o"ce buildings. In addition, tourism would be another sector that could be stimulated, as meetings of directors in the jurisdiction might be a requirement for incorporation. Finally, the tax haven sector is a course of revenue for the government. There will always be some form of tax or fee for which foreign investors will be liable, no matter how the tax system will be like. For Singapore banks, for example, profits from domestic sources are taxable while income from foreign sources is exempt. Also, indirect taxes such as customs duties and sales taxes are fully taxable in most OFCs.
Taxation advantages in OFCs Low taxation is perhaps the primary reason attracting institutions. Specifically, the advantages o!ered by OFCs can be categorized as income tax advantage, absence of estate, inheritance and gift tax, bilateral tax treaties, and the existence of features in the tax systems of developed countries that allow taxpayers to take advantage of the benefits o!ered of OFCs. Taxes and levies on o!shore business are virtually nonexistent in OFCs, in “marked contrast” to the situation in alternative locations. The taxation treaties in major OFCs around the globe can be summarized as Table 1. Almost none of these OFCs impose minimum reserve requirement; None of them enforces withholding taxes on internal income; And they impose very limited profit tax, if any at all.
Jurisdiction
Taxes & levies
Annual license fee
Min. reserve requirement
Anguilla
None
EC$1,350
None
Bahamas
None
US$300-45,000
None
Bahrain
None
US$25,000
None
Cayman Islands
None
C$5,000-15,000
None
PAGE 6 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
Jurisdiction
Taxes & levies
!
SURVEYING STUDIO III
Annual license fee
Min. reserve requirement
Hong Kong
10% withholding tax on interest paid (proposed 17% offshore profit tax)
None
None
Jersey
£300 per annum for corporate tax companies
None
None
Lebanon
None
None
None
Luxembourg
40% profit tax 40% municipal business tax 30% liquidity ratio
None
None
Netherlands Antilles
3-6% profit tax
None
None
New Hebrides
None
$A 1,000
None
Panama
None
None
None
Philippines
5% profit tax (on offshore to offshore transactions) 10% profit tax (offshore to onshore)
US$20,000
None
Seychelles
None
US$20,000
None
Singapore
10% profit tax (on offshore operations)
S$50,000
None
United Arab Emirates
None
None
None
Table 1 Taxation treaties in major OFCs around the globe 11
11
Mika Casnegra de Jantscher, Tax Havens Explained PAGE 7 OF 9!
GROUP 8
SUBJECT: TAXATION REFORM IN HONG KONG!
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SURVEYING STUDIO III
PART III: Proposal for Hong Kong’s Taxation Reform Double taxation Treaty The Tax in Hong Kong is subject to territorial rules(or residence rules), which means only those profits which arise in or are derived from Hong Kong are liable to tax in Hong Kong. This is sometimes quite di!erent from the tax rules of other jurisdictions, for example, United States, which levies its tax based on the nationality of American people. To avoid the conflicts of interest in levying taxes with other jurisdictions, and also to lower the double tax burden of foreign investors in Hong Kong thus improving the investment environment in Hong Kong, double tax agreement will play an important role in such situations. According to KPMG International fund and fund management survey database for Hong Kong, Hong Kong has a comprehensive double tax agreement with Belgium, Thailand, and, more recently, with Mainland China, Vietnam, and Luxembourg. The Hong Kong government is presently in the process of negotiating a double tax agreement with Italy and the Netherlands.” For Hong Kong to be a competitive Asian o!shore financial center, we suggest the HKSAR government to speed up the negotiation process with other world famous financial jurisdictions in achieving more double taxation treaties as early as possible. A complete and comprehensive double taxation treatment system will attract investors from di!erent jurisdictions all over the world into Hong Kong with little concern about taxation problem.
Exemption of holding company, funds and stamp duty Nowadays, holding companies, funds and trusts are treated as normal business and similarly subject to profit tax in Hong Kong. As it is always the case, other major o!shore financial centers in the world are also the center of registration of holding companies and funds. If Hong Kong prefers to take up these roles in future, it is better to consider a special and comprehensive taxation treatment for holding companies and funds. We suggest HKSAR government to simply exempt the tax for holding companies and funds in Hong Kong to give better incentives for foreign investors to register their holding companies here and establish o!shore funds in Hong Kong as well. The loss of these exemptions is relatively small, and it could be o!set by other tax increments from the prosperity of Hong Kong as an o!shore financial center. As discussed in part 1, stamp duty is the major taxation related to the transactions of commodities in the Hong Kong Exchange market. According to the annual report 2007-08 of the Inland Revenue Department, during the peak periods, i.e. the so-called economic crest like in 2008, where the PAGE 8 OF 9!
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SUBJECT: TAXATION REFORM IN HONG KONG!
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SURVEYING STUDIO III
transaction volume per day were huge, stamp duty would be the second major tax income source (concluded for 25.7% of total tax incomes) of the HKSAR government. On the other hand, in a complicated regulatory environment like Hong Kong 12, changing the stamp duty rate will greatly a!ected the transaction volume as suggested by Umlauf (1993). Therefore, providing stamp duty fee exemption would be the most appropriate measure to increase the investment incentive to the foreign funds and trusts, rather than decreasing the stamp duty rate. The details of the fee exemption should be discussed further in order to strike a balance between of the resulting benefits and induced implications.
References 1. KPMG International fund and fund management survey database for Hong Kong 2. Inland Revenue Department Annual Reports: http://www.ird.gov.hk/eng/ppr/are.htm 3. Lam, N. M. K. (2000). "Government Intervention In The Economy: A Comparative Analysis of Singapore and Hong Kong." Public Administration and Development 20: 397-421. 4. Hu, S.Y. (1998). “The e!ects of the stock transaction tax on the stock market – Experiences from Asian markets.” Pacific-Basin Finance Journal 6(3-4): 347-364. 5. Umlauf, S.R. (1993). “Transaction taxes and stock market behavior: the Swedish experience.” Journal of Financial Economics 33: 227–240. 6. Low-tax.net: www.lowtax.com
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Hong Kongʼs financial market is regulated by the Hong Kong Monetary Authority (HKMA), Securities and Futures Commission (SFC), Hong Kong Insurance Authority (HKIA) and Hong Kong Association of Banks (HKAB) with different sets of regulations. PAGE 9 OF 9!
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