The United States’ suspension of a reciprocal tax exemption arrangement with Hong Kong for shipping companies will jack up the cost of trade and fuel uncertainty and anxiety for the pandemic-ravaged industry, ending up in a “lose-lose” situation, stakeholders warn.
As part of US President Donald Trump’s executive order last month to terminate trade privileges granted to the city under the Hong Kong Policy Act of 1992, Washington announced on Thursday it would suspend a bilateral agreement that allowed shipping firms to avoid double taxation since 1989.
Without giving details on when the decision would be executed, the move left US-Hong Kong container ships in a sea of uncertainty.
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“They face great uncertainty and even anxiety due to the sudden changes to the arrangement that has been put in place for more than 30 years,” said Louis Chan Wing-kin, the Hong Kong Trade Development Council’s assistant principal economist in global research.
“There are collateral impacts on Hong Kong and the US shipping firms, shipowners, ships that use the city for repairs and maintenance, and the shipping companies will have to recalibrate tax obligations.”
He added that the news would add to the woes of global trade which was already reeling from the Covid-19 pandemic.
The United States was Hong Kong’s No 2 trading partner after mainland China last year, with bilateral trade worth HK$517 billion (US$65 billion), or 6.2 per cent of the city’s total. The US last year had a trade surplus of US$26.4 billion with Hong Kong, the country’s highest.
Trump stripped the city of its economic privileges after accusing Beijing of eroding Hong Kong’s autonomy under the “one country, two systems” principle by imposing the national security law on the city on June 30. Washington also sanctioned the chief executive and 10 other current and former Hong Kong and mainland officials for their involvement in the legislative process.
The Hong Kong government denounced the US’ decision to suspend the agreement on tax exemptions, which covered income derived by residents or companies from the international operations of ships.
“Should the agreement between Hong Kong and the US be terminated, for the US companies, they would need to pay taxes to both the US and Hong Kong governments, whereas Hong Kong companies will be required to pay tax to the US government only, as their shipping income is exempted from tax liability in Hong Kong by virtue of Section 23B of the Inland Revenue Ordinance,” a government spokesman said.
He said the termination of the agreement did not help any party because it would add to the operating costs of the shipping companies, in particular US ones, as they would be subject to double taxation.
“It will hamper the development of the shipping sector between Hong Kong and the US, and is to nobody’s interest,” he said.
The US and seven other countries – Denmark, Germany, the Netherlands, Norway, Singapore, Sri Lanka and Britain – all had separate bilateral agreements with Hong Kong to avoid double taxation on shipping income.
Chan, the economist, said Hong Kong was known for its simple and low-tax regime, which attracted many ships to register in the city.
Under the agreement that took effect in August 1989, either party can terminate it by a written notice, he said.
As of July, about 2,600 ships, totalling 129 million gross tonnes, registered in Hong Kong. The city, Panama, the Marshall Islands and Liberia are among the top choices to register ships in the world.
The Hong Kong Shipowners Association, whose members own or manage 40 per cent of about 2,400 ocean-going Hong Kong-flagged ships, said the new arrangement would raise the operating costs of some companies in both Hong Kong and the US, even though the impact on individual firms varied and depended on the trading patterns of their vessels.
“It is in the interest of both the US and Hong Kong shipping sectors for the existing arrangement to avoid double taxation to continue,” it said in reply to the Post’s queries.
“Indeed, facilitating global trade and ensuring the smooth function of the world’s supply chains of essential items is particularly important in this difficult time for all.”
According to Kathy Kun Chau-ying, senior manager at Ernst & Young Hong Kong’s national tax centre, Hong Kong shipping companies which derive any transport income from the US shore will be subject to a 4 per cent tax on their gross income after the arrangement ends.
Their US counterparts, if making casual calls at Hong Kong ports, are still exempted from taxes, but the Inland Revenue Department has the authority to evaluate whether to impose a 16.5 per cent profit tax on them based on how frequently they visit.
“Therefore, the more frequent US shipping companies call on Hong Kong ports, the higher the chance the city will have more tax income from them,” Kun said.
Hong Kong Shippers’ Council chairman Willy Lin Sun-mo called the suspension a “lose-lose situation”.
“The [tax] sanction is more about window dressing in suppressing Hong Kong,” Lin said. “The US puts Hong Kong on a knife edge, is it a glorious thing for a big country to do to a small city?”
Trump also suspended a bilateral agreement on the extradition of fugitives and terminated a mutual agreement on transfer of sentenced persons on Thursday.
Last week, he demanded Made-in-Hong Kong exports to the US be changed to Made in China on product labels as part of sanctions.