Companies will have to review their structures after the Hong Kong government said it would amend its tax law and implement regulations to help the European Union (EU) combat tax evasion, experts said.
The government said late on Tuesday that it would make the changes to combat tax evasion by certain offshore units set up by European firms in the city, a situation that could add to uncertainties around business operations in the city.
“The introduction of the new tax law will add a lot of unknowns and uncertainties for companies in Hong Kong. Some companies may lose their tax-free status after the law change, while some may be required to do more reporting to the authorities for them to get tax exemptions. It is vital for the government to unveil the details of the proposed law changes as soon as possible,” said Rex Ho, financial services tax leader at PwC.
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The government said that it would amend the tax law by the end of next year and implement regulations in 2023. Hong Kong was added to the EU’s “grey list” of non-cooperative tax jurisdictions on Tuesday, according to a note published by accountancy firm KPMG last month.
The EU sees the non-taxation of certain foreign sourced passive incomes, such as interest and royalties, of European businesses set up in Hong Kong that have no substantial economic activity in the city as potentially leading to situations of “double non-taxation”, a Hong Kong government spokesperson said on Tuesday night.
“The proposed legislative amendments will merely target corporations, particularly those with no substantial economic activity in Hong Kong, that make use of passive income to evade tax across a border. Individual taxpayers will not be affected,” the spokesperson said.
The EU was targeting the use of shell companies in Hong Kong to achieve double non-taxation, said Anthony Lau, chairperson of the taxation committee of CPA Australia, an accountancy industry body. “Hence, for companies – regardless of whether they are small or large – that do not have real economic activity in Hong Kong, they may need to review their intellectual property and financing structures in Hong Kong to see if the upcoming law change will have an impact on them,” he said, adding that the government’s actions would not result in wholesale changes to either the simple taxation system in Hong Kong, nor the territorial tax system used here. Hong Kong only taxes profit or revenue earned in the city.
The EU’s actions were part of an ongoing, wider campaign to ensure that income was booked in a location where the actual activity giving rise to that income occurred, said John Timpany, partner and head of tax for Hong Kong at KPMG China. “It is clear that the changes will be targeted and not result in a wholesale rewriting of the Hong Kong tax law. I do not expect that this change will fundamentally alter the attractiveness of Hong Kong as Asia’s premier international finance and business location,” Timpany said.
The Hong Kong government will consult stakeholders on the specific contents of the legislative amendments and will work to minimise companies’ compliance burdens, its spokesperson said. The government will also request that the EU swiftly remove Hong Kong from a watch list after it amends the relevant tax arrangements, the statement said.
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