Hong Kong has been refining its tax policies and incentives to align with global shifts while appealing to multinational corporations, according to industry practitioners speaking at the recent ACCA Hong Kong tax conference. This transition follows the roll-out of the tax-base erosion and profit-sharing (BEPS) initiative by the Organisation for Economic Co-operation and Development (OECD).
‘Over the past two to three years, the global tax arena has undergone significant changes. Maintaining a competitive tax system will be important for Hong Kong to remain an attractive international investment centre,’ said Ingrid Lau, PwC partner for integrated tax and business advisory.
Sharpening rules
One refinement has been to Hong Kong’s foreign-sourced income exemption (FSIE) regime. Substance requirements have been strengthened so that only passive income meeting certain economic participation criteria now qualifies for exemption from local taxation.
Trader relief has also been introduced under the FSIE rules. For example, gains realised from selling foreign real estate will be exempt if the company satisfies the requirements for recognition as an active trading business.
As tax rules evolve locally and globally, it is increasingly challenging to keep up
A new tax certainty enhancement scheme provides optional simplicity by ‘allowing taxpayers to elect to categorise domestic equity gains meeting specified conditions as non-taxable, bypassing the analysis of complex “badges of trade” factors’, said Lau.
At the same time, a family office tax concession provides a 0% tax rate on profits from qualifying investments made through family-owned holding vehicles. A charitable organisation or public trust exempt under section 88 can now hold up to 25% interest in an eligible family office or holding vehicle.
Looking ahead, Lau pointed to some proposed changes to encourage innovation and attract multinational companies. These include a reduced 5% tax rate for qualifying patent income under a new ‘patent box’ incentive.
Also under consideration is a redomiciliation regime that would allow foreign businesses to ‘retain their existing corporate structure when changing the place of incorporation of existing companies to Hong Kong, rather than undergoing complicated processes such as winding up procedures and the formation of an entirely new legal entity’, Lau explained.
Top-up taxes
With Hong Kong set to adopt the OECD’s global minimum tax framework beginning in January 2025, multinational and local companies need to start preparing now for how the new measures will impact their operations.
‘Compliance will be time-intensive,’ said Sarah Chan FCCA, APAC tax director at Belden. She explained how her organisation had set out ‘a full-year roadmap including modelling calculations, assessing impacts, planning implementation and ensuring clear communication across finance, tax and other teams’.
Pillar Two’s requirement that companies recalculate tax rates on overseas profits could result in additional top-up taxes if rates fall below the 15% minimum threshold. ‘Businesses need to identify jurisdictions where tax rates are below the minimum, and to assess options such as incentive claims that may be impacted,’ advised Kenny Wei FCCA, transfer pricing partner at EY.
‘Data quality is critical as it will directly affect compliance’
For companies without dedicated in-house tax teams, KPMG tax partner Eva Chow ACCA recommended the use of tech tools. ‘Automate financial data extraction for calculations and focus on cross-departmental collaboration to obtain crucial data points efficiently,’ she said. ‘Data quality is critical as it will directly affect compliance.’
Tommy Hui, senior manager for tax services at PwC, suggested that companies ‘leverage the available government subsidies to help accelerate digital transformation and upskill their team to improve the internal processes required’.
Specific concerns
When it comes to the BEPS Pillar One proposals, the specifics around ‘amount B’ may have broader implications for Hong Kong businesses.
Wei explained: ‘Previously, it was thought the revenue threshold of €20bn would mainly impact tech companies under amount A. However, amount B has no threshold and applies broadly to wholesale businesses.’
While Hong Kong wholesale margins tend to be higher than those scoped under amount B, local businesses that distribute overseas could see effects. To mitigate risks, Wei advised companies to consider various measures such as business restructuring or intercompany price adjustment.
Chan pointed out: ‘As the implementation of the rules on amount B is optional, companies may need a tracker to stay on top of evolving rules. For example, will inbound and outbound transactions be treated similarly by authorities?’
‘It is crucially important to dedicate sufficient time and resources to Pillar Two compliance, while also closely monitoring updates to Pillar One,’ said Wilson Cheng FCCA, co-chairman of ACCA Hong Kong’s tax subcommittee and EY partner and tax leader for Hong Kong and Macau. ‘Many details regarding amount B remain undetermined, which will likely influence overall planning strategies.’
Crypto changes
Following the introduction of the Common Reporting Standard (CRS) to boost the transparency of traditional financial assets, the OECD is now expanding its efforts to emerging digital currencies through a new crypto-asset reporting framework.
‘As digital economies and the use cases of digital assets expand, regulators are looking to improve transparency without creating excessive burden to the industry,’ said Hui.
‘Tax should be an integral part of core business consideration when launching new products’
The framework mirrors CRS but updates the definitions to specifically include crypto assets such as bitcoin and relevant stablecoins. Compliance will be complex, according to Chow. ‘The crypto industry is still relatively new, so clear guidance is needed on what constitutes a reportable service provider given the diverse counterparties involved,’ she said.
On-chain and off-chain data aggregation plus outsourcing mean reporting models may differ from traditional financial products. Cheng said: ‘Companies must understand underlying crypto protocols to facilitate transparency from the start. Otherwise, gaps may emerge between reporting standards and infrastructure that are difficult to fix later.’
Plan proactively
As tax regulations evolve at both local and global levels, accountants and auditors are finding it increasingly challenging to keep up. Wei said: ‘The best way to deal with this is through proactive engagement – gathering data, conducting assessments, planning mitigations and the process overall, rather than reacting passively.’
Hui agreed. ‘It is crucial to learn about these new developments early on to assess the potential impacts. The implications of different tax legislative changes need to be considered in the context of the overall group through modelling and calculations.’
Chow underscored the need for a shift in mindset to view tax as more than just a post-profit adjustment. ‘Tax should be an integral part of core business consideration when launching new products or pursuing M&A. It plays a vital role in informed decision-making and strategic planning, facilitating the implementation of these important initiatives.’
More information
Read our articles from ACCA Hong Kong’s tax conference: Hong Kong set for growth and Building business resilience.
