Cross-Border Tax Regimes. Steven Sieker Partner, Baker McKenzie 28 June 2018

Transcription

1 Cross-Border Tax Regimes Steven Sieker Partner, Baker McKenzie 28 June 2018

2 Taxation in the Cross-Border Context Payer service recipient / borrower / IP licensee / employer payments for services rendered / interest / royalties / salary etc. Recipient service provider / lender / IP licensor / employee In a cross border context, the same foreignsourced income may be taxed twice, by both: a) The state from where the income arises (state A) (on a source basis); and b) The resident state of the income recipient (state B) (on a residence basis), State A State B resulting in double taxation 2

3 Taxation in the Cross-Border Context Hong Kong: Generally only imposes tax on a source basis Potential risk of double taxation in respect of, e.g. Salary paid by a HK subsidiary / PE to foreign employees in respect of employment exercised / services rendered in HK Interests and royalties received by a HK subsidiary / PE (which constitute profits of the subsidiary / PE derived from a business / trade carried on in HK) from an enterprise resident in another state which imposes withholding tax Profits attributable to a HK PE of an enterprise of another state (e.g. PRC) which taxes on a residence basis 3

4 Taxation in the Cross-Border Context To address double taxation, states may: a) Provide for the provision of unilateral relief under their domestic tax laws; and/or b) Enter into double taxation agreements ( DTAs ) to provide double taxation relief to residents of one or both of the contracting states, by way of i. Eliminating / reducing the taxing rights of the source state (state A); ii. Requiring the resident state (state B) to provide foreign tax relief to eliminate any (residual) double taxation 4

5 One Belt One Road Countries with DTAs with HK Of the 75 countries below linked to / which have signed agreements with respect to the Belt and Road Initiative 1, 22 countries (in red) have signed, and 6 countries (underlined) are in negotiations to sign, a comprehensive DTA with Hong Kong 2,3 East Asia Southeast Asia Central Asia South Asia Middle East Africa Europe Central America and the Caribbean Oceania China, Korea, Mongolia Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Timor-Leste, Vietnam Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan Afghanistan, Bangladesh, Bhutan, India 4, Maldives, Nepal, Pakistan, Sri Lanka Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia 4, Palestine, Syria, UAE, Yemen Ethiopia, Madagascar, Morocco, South Africa Albania, Armenia, Austria, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Latvia, Lithuania, Macedonia, Moldova, Montenegro, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey, Ukraine Antigua and Barbuda, Panama, Trinidad and Tobago New Zealand 1 See 2 See 3 Note: Hong Kong has also concluded limited DTAs that address air services income and/or shipping income only, and tax information exchange agreements (TIEAs) with various other OBOE countries. 4 The DTA has not yet come into force. 5

6 General Operation of DTAs Applies to persons who are residents of one or both contracting states, and to specified taxes (generally, taxes on income and capital) only (i) Allocates taxing rights between contracting states based on the type of income / capital gain in question An example of how taxing rights may be allocated Income / Capital Classification Source State (State A) Resident State of the Recipient (State B) Profits Dividends / interests / royalties Employment income Full rights to tax profits attributable to PE(s) (of the enterprise) situated in the source state only No / limited taxing rights (generally up to 15% of the gross amount) Full rights to tax income derived in respect of employment exercised in the source state, provided that one of the prescribed connecting factors is present only Full rights to tax the profits of the resident enterprise Full taxing rights Full rights to tax the employment income of the resident Capital gains Depends on the type of capital gain Full taxing rights 6

7 General Operation of DTAs (ii) Requires the resident state to provide foreign tax relief to eliminate any (residual) double taxation by way of the method stated in the DTA, e.g. Foreign tax credit method: through setting source state (state A) tax liability against resident state (state B) tax liability Exemption method: through excluding foreign source income, in respect of which the source state (state A) has a taxing right, from the resident state (state B) tax base Example: A Co borrower State A WHT: 20% (domestic law), limited to 10% under DTA interest (100) HK Co lender Hong Kong Profits tax: 16.5% (domestic law), not limited under DTA - State A has limited rights to tax the interest paid by A Co on a withholding basis (10% of 100, instead of 20% of 100) under the DTA - HK has full rights to tax the profits of HK Co (16.5% of 100) (provided that the profits can be said to derive in HK from a business / trade carried on in HK), but must provide a credit for the tax (10) paid to State A - Total tax payable = 10 withholding tax to State A profits tax to HK no double taxation 7

8 Other Benefits of DTAs Aside from providing relief against double taxation Provides certainty as to how foreign-sourced income will be taxed / clarifies the taxing rights of contracting states Results in lower (or the elimination of) withholding taxes on dividend / interest / royalty income Tax rates generally limited to up to 15% for DTAs concluded by Hong Kong Provides certainty as to what constitutes a PE, and the rules for taxing enterprises with PEs Contains non-discrimination provisions requiring contracting states to treat locally-situated PEs / resident subsidiaries of enterprises of the other contracting state not less favourably than like resident enterprises, to allow expenses to be deducted by resident and non-resident enterprises under the same conditions etc. Contains provisions on the exchange of information between tax authorities of the contracting states 8

9 So in terms of choosing which companies to conduct business with, from a tax perspective, choose : Companies that are resident in countries which have concluded DTAs with Hong Kong where payments are liable to taxed twice Other considerations: Types of income / capital covered by the DTA Maximum withholding tax rates under the DTA Method of foreign tax relief under the DTA 9

10 Steven Sieker Partner, Baker McKenzie steven.sieker@bakermckenzie.com [Web Address]

11 [Web Address]

12 HONG KONG AS THE DEAL MAKER CASE SCENARIO Countries among the Belt and Road would like to take a coordinated approach to build, buy, convert, interconnect and operate a network of 5G-enabled mobile radio towers.