Hong Kong Tax Review 2017

Transcription

1 Hong Kong Tax Review 2017

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3 Hong Kong: 2017 year in review We applaud the Hong Kong Special Administrative Region (HKSAR) Government s efforts during year 2017 in both (i) enacting/proposing various tax incentives for different industries in Hong Kong to foster Hong Kong s economic development and (ii) taking steps to align Hong Kong s tax system with the latest international tax standards. To enhance the competitiveness of Hong Kong s tax system, a concessionary tax regime for aircraft leasing businesses was enacted in 2017 and a number of tax measures have been proposed pending the enactment of the necessary legislative amendments, including (i) profits tax exemption for onshore privately offered Open-ended Fund Companies (OFCs); (ii) a two-tier profits tax system and (iii) a super tax deduction for qualifying Research and Development (R&D) expenditure. To ensure Hong Kong complies with the latest international tax standards, the HKSAR Government is working on various pieces of draft tax legislation to implement the four minimum standards under the Base Erosion & Profit Shifting (BEPS) project as well as to expedite the expansion of Hong Kong s network for automatic exchange of financial account information in tax matters (AEOI). Forthcoming changes expected to take place in this area include: (i) introduction of a Transfer Pricing (TP) regime and mandatory TP documentation (including Country-by-Country (CbC) reporting) requirement in Hong Kong; (ii) removing the ring-fencing feature in the existing concessionary tax regimes for corporate treasury centres, offshore reinsurance businesses and offshore captive insurance businesses; (iii) implementing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Multilateral Convention) signed by China in Hong Kong, and (iv) legislating the Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent BEPS (the Multilateral Instrument or MLI) into the domestic law of Hong Kong. This review recaps the major tax developments that took place in 2017 and highlights the tax changes expected to take place in early The details of most of these developments have been covered in our Hong Kong Tax News Flashes, Hong Kong Financial Services Tax News Flashes, Hong Kong Transfer Pricing News Flashes and International Assignment Services Hong Kong Publications issued during the year.

4 Progress of implementing the BEPS measures in Hong Kong The bill on implementing various BEPS measures A bill that seeks to implement the following minimum BEPS standards in Hong Kong was gazetted on 29 December 2017: removing the ring-fencing feature exists in the current concessionary tax regimes for (i) corporate treasury centres; (ii) reinsurance businesses and (iii) captive insurance businesses (BEPS Action 5); introducing a TP regulatory regime and a three-tiered TP documentation (including the CbC reporting) requirement in Hong Kong (BEPS Action 13); putting in place a statutory dispute resolution mechanism by requiring the Commissioner of Inland Revenue (CIR) to give effect to mutual agreements made with other treaty jurisdictions under the Mutual Agreement Procedure (MAP) or arbitration process of a tax treaty (BEPS Action 14); clarifying the double tax reliefs available in the absence or in presence of a tax treaty; extending the time limit of making a fresh foreign tax credit claim from two years to six years after the end of relevant year of assessment; and empowering the CIR to prescribe a threshold requirement for determining whether profits producing activities are carried out in Hong Kong in respect of existing concessionary tax regimes. The bill has to be scrutinised and approved by the Legislative Council before enacted into law. Please refer to our Hong Kong Tax News Flash, January 2018, Issue 1 and Transfer Pricing News Flash, December 2017 for a more detailed discussion of the bill. 1 PwC

5 Hong Kong became a signatory to the Multilateral Instrument Hong Kong, being represented by China, became a signatory to the MLI at the signing ceremony held by the Organisation for Economic Cooperation and Development (OECD) on 7 June The MLI will help modify bilateral tax treaties more swiftly and thus facilitate the implementation of the treatyrelated measures in countering BEPS. In implementing the MLI, the HKSAR Government has only opted for those provisions that represent the minimum BEPS standards (e.g. the principal purposes test and the minimum three-year period for taxpayers to initiate the MAP) and has opted out of the other provisions that are not mandatory. The HKSAR Government plans to introduce a bill relating to the MLI to the Legislative Council in mid Please refer to our Hong Kong Tax News Flash, June 2017, Issue 6 for a more detailed discussion on Hong Kong s MLI position. Hong Kong Tax Review

6 Update on Hong Kong tax treaty network Hong Kong signed three new tax treaties during 2017, bringing the total number of Hong Kong tax treaties to 38 as of December In addition, the tax treaties with Latvia (signed in 2016) as well as Belarus and Pakistan (both signed in 2017) entered into force in Please refer to the table below for more details of these tax treaties. Jurisdiction Date of signing Date of entry into force Effective date in Hong Kong (year of assessment) Effective date in the other contracting jurisdiction Belarus January 2017 November /19 1 January 2018 Latvia April 2016 November /19 1 January 2018 Pakistan February 2017 November /19 1 July 2018 Saudi Arabia August 2017 Pending Pending Pending In addition, the second protocol to the Hong Kong-New Zealand tax treaty was signed by Hong Kong on 15 June 2017 and by New Zealand on 28 June 2017 to allow both parties to exchange information on an automatic or a spontaneous basis. Looking into 2018, it is expected that Hong Kong will sign a few more tax treaties with its trading partners. One of them will be the Hong Kong-India tax treaty which is expected to be signed soon as the approval process of the treaty in India has recently been completed. Another treaty-related development in 2017 is the revised regulations for claiming treaty benefits in Indonesia. Under the revised rules, which apply from 1 August 2017, the major hurdle (i.e., the subject to tax requirement) for Hong Kong tax residents to apply the Hong Kong-Indonesia tax treaty has been removed. For more details and other changes introduced by the revised regulations, please refer to our Hong Kong Tax News Flash, July 2017, Issue 9. 3 PwC

7 The tax summit on new directions for taxation The HKSAR Government held the Summit on the New Directions for Taxation on 23 October 2017 to explore the new directions for taxation in Hong Kong. At the summit, the Financial Secretary revealed that the current administration will adhere to the following four principles in formulating future tax policies and measures: the tax measures should be targeted (i.e., tailor-made for specific industries) the tax measures should be able to generate considerable economic and social benefits the tax measures must be simple and easy to operate so as to allow Hong Kong to maintain the existing simple and low tax regime, but yet with manageable risks of tax avoidance the tax measures must be able to meet the international tax standards With these four key principles, we look forward to seeing more supportive tax policies/measures that will assist Hong Kong companies to better capture new business opportunities, particularly related to China s Belt and Road Initiative. Please refer to our Hong Kong Tax News Flash, October 2017, Issue 11 for more details of the tax summit. Hong Kong Tax Review

8 Key tax legislative developments in 2017 The table below summarises the tax legislation enacted in 2017: Legislation Key subject matter Effective date 1. Inland Revenue (Amendment) Ordinance 2017 (enacted on 2 June 2017) Implementing the tax measures proposed in the 2017/18 Hong Kong Budget, including: A 75% tax rebate for year of assessment 2016/17, subject to a ceiling of HK$20,000 Widening the marginal tax bands for salaries tax purposes from HK$40,000 to HK$45,000 Increase in certain personal allowances and self-education expense deduction ceiling for salaries tax purposes For more details of the other budget proposals, please visit our website dedicated to the 2017/18 Hong Kong Budget 1. Year of assessment 2016/17 Year of assessment 2017/18 Year of assessment 2017/18 2. Inland Revenue (Amendment) (No.2) Ordinance 2017 (enacted on 16 June 2017) 3. Inland Revenue (Amendment) (No.3) Ordinance 2017 (enacted on 7 July 2017) Adding 73 jurisdictions to the list of reportable jurisdictions of Hong Kong (in addition to Japan and the UK which are already in the list) for the AEOI purpose fullstop. Introducing a concessionary tax regime for qualifying aircraft leasing businesses and qualifying aircraft leasing management businesses in Hong Kong Introducing a provision to deem the profits derived from carrying on an aircraft leasing business or an aircraft leasing management business in Hong Kong to be chargeable to profits tax even if the aircraft concerned is used outside Hong Kong. Please refer to our Hong Kong Tax News Flash, March 2017, Issue 4 and Hong Kong Financial Services Tax News Flash, May 2017 for more details of the new tax regime. 1 July April July PwC

9 The table below summarises the draft tax legislation pending enactment as of the end of 2017: Bill Key subject matter Gazettal date 1. Inland Revenue (Amendment) (No.4) Bill 2017 Extending the profits tax exemption for offshore investment funds to onshore privately offered OFCs, subject to specified conditions Please refer to our Hong Kong Financial Services Tax News Flash, June 2017 for more details of the bill. 23 June Inland Revenue (Amendment) (No.5) Bill 2017 Enabling Hong Kong to adopt the Multilateral Convention signed by China and other agreements on international tax cooperation that apply to Hong Kong Amending certain IRO provisions on AEOI so that they align with the international standard stipulated by the OECD 6 October Inland Revenue (Amendment) (No.6) Bill 2017 Implementing various BEPS measures that represent the minimum standards in Hong Kong (please refer to the section Progress of implementing the BEPS measures in Hong Kong above) Please refer to our Hong Kong Tax News Flash, January 2018, Issue 1 for a more detailed discussion of the bill. 29 December Inland Revenue (Amendment) (No.7) Bill 2017 Introducing a two-tier profits tax system in Hong Kong under which the first HK$2 million of assessable profits will be taxed at 8.25% (for corporations) or 7.5% (for unincorporated businesses) Please refer to our Hong Kong Tax News Flash, December 2017, Issue 13 for a more detailed discussion of the bill. 29 December Stamp Duty (Amendment) Bill 2017 Introducing a flat rate of 15% for the ad valorem stamp duty (AVD) chargeable on residential property transactions executed on or after 5 November 2016, in lieu of the existing Scale 1 rates (i.e., the doubled AVD rates), with certain exceptions 27 January Stamp Duty (Amendment) (No.2) Bill 2017 Extending the 15% flat AVD rate to acquisition of more than one residential property under one instrument by Hong Kong permanent residents on or after 12 April May 2017 Other tax proposals under consideration In addition to the above, the HKSAR Government has proposed the following tax measures of which the related draft tax legislation is expected to be issued soon: Introducing a 300% tax deduction for the first HK$2 million of qualifying R&D expenditure incurred by enterprises and 200% tax deduction for the remaining expenditure. Expanding the scope of tax deduction for capital expenditure incurred for the purchase of intellectual property rights to layout-design of integrated circuits, plant varieties and rights in performance as proposed in the 2016/17 Hong Kong Budget Hong Kong Tax Review

10 Guidance issued by the Inland Revenue Department (IRD) The table below summarises the guidance issued by the IRD in late 2016 and during 2017: Guidance Key subject matter Date of issuance 1. Departmental Interpretation and Practice Notes (DIPN) No.53 Setting out the IRD s views, with numerous illustrative examples, on the profits tax treatment of regulatory capital securities issued by financial institutions in compliance with Basel III capital adequacy requirements 22 February DIPN No.54 Setting out the IRD s views on the interpretation and application of the various provisions of the concessionary tax regime for the aircraft leasing businesses in Hong Kong 27 October Revised guidance on corporate amalgamation Providing further guidance on the utilisation of tax losses of amalgamating companies and amalgamated companies respectively 16 December PwC

11 Update on Hong Kong profits tax cases The Perfekta Enterprises case The Court of First Instance (CFI) held on 27 April 2017 that the initial payment received by the taxpayer for co-developing with a land developer a piece of land originally acquired by the taxpayer as a capital asset is revenue in nature and taxable. The court found that there was a change of the taxpayer s intention from capital holding to trading when the taxpayer entered into the redevelopment agreement with the land developer and before the transfer of the subject land to its subsidiary for carrying out the redevelopment. The taxpayer has subsequently lodged an appeal against the CFI s judgment to the Court of Appeal (COA), which will be heard on 11 April Please refer to our Hong Kong Tax News Flash, June 2017, Issue 5 for a more detailed discussion of the case and our comments. Board of Review Case D2/16 (published in April 2017) In this case, the Board held that the trading profits derived by a Hong Kong company (which entered into an import processing arrangement with its wholly owned subsidiary in China) from the sale of finished goods to its customers in China were sourced in Hong Kong. In addition, the Board concluded that in the absence of a primary TP adjustment made by a tax treaty partner (i.e., the Chinese tax authority in this case), no unilateral TP adjustment can be made to reduce the taxpayer s allegedly inflated Hong Kong sourced profits despite the taxpayer claimed that the profits were not stated on an arm s length basis. Please refer to our Hong Kong Tax News Flash, June 2017, Issue 7 for a detailed discussion of the Board s decision and our comments. Hong Kong Tax Review

12 Hong Kong salaries tax developments Increase in certain personal allowances and changes to concessionary deductions The 2017/18 Budget delivered on 22 February 2017 proposed to: widen the marginal tax bands from HK$40,000 to HK$45,000 for salaries tax purposes increase certain personal allowances and the self-education deduction ceiling extend the entitlement period for home loan interest deduction to 20 years All of the above salaries tax proposals were enacted into law in June 2017 and are effective from year of assessment 2017/18. Please refer to our International Assignment Services Hong Kong Publication, March 2017 for a more detailed discussion of the salaries tax measures in the 2017/18 Budget. 9 PwC

13 Update on salaries tax court cases The Poon Cho-ming case In Hong Kong Tax Review , we reported that the CFI held in this case that (1) payment in lieu of a discretionary bonus made to the taxpayer and (2) stock option gains derived by the taxpayer from the accelerated vesting of certain previously granted options upon termination of his employment were income from employment and subject to salaries tax despite such payment and accelerated vesting were not provided for in the taxpayer s employment contract. Subsequently, the taxpayer has appealed against the CFI s judgment to the COA. The appeal was heard on 16 May 2017 but the judgment has yet to be published. The Pang Fai case The case concerned whether a sum described as honorarium received by an individual from an accounting professional body for acting as a workshop facilitator and examination marker should be assessed under salaries tax or profits tax. The Board held in Case D11/16 that it was inapt to apply either the economic reality test or the control test to determine whether an employer-employee relationship existed between the individual and the professional body. By making a macro holistic evaluation of all the facts together, the Board held that the individual was not an employee and the amount should be chargeable to profits tax. The Commissioner of Inland Revenue (CIR) appealed against the Board s decision to the CFI. The CFI dismissed the CIR s appeal by a judgment handed down on 3 November It held that as the Board did not misdirect itself in law or reach a conclusion that no tribunal properly directing itself on the relevant facts could reasonably have reached, it is not justifiable for the court to interfere in the Board s conclusion that the taxpayer was not an employee of the professional body. 3 Hong Kong Tax Review 2016 can be accessed via this link: Hong Kong Tax Review

14 List of Hong Kong Tax News Flashes issued in 2017 and early 2018 The IRD s latest comments on corporate amalgamation and other profits tax issues The IRD commented on issues related to tax treaty application Hong Kong revises its strategy on implementing automatic exchange of financial account information Hong Kong ready for the buoyant aircraft leasing market with the new tax regime Receipt for entering into a co-redevelopment of a piece of land is found to be revenue in nature Hong Kong reaffirming its stance against treaty abuse by being a signatory to the Multilateral Instrument Downward transfer pricing adjustment is only possible in the presence of a primary adjustment by a treaty partner Implementing automatic exchange of financial account information in Hong Kong The AEOI Portal The new Indonesian rules remove a major hurdle for Hong Kong tax residents to apply the HK-Indonesia tax treaty New tax measures to take Hong Kong s economy to greater heights New directions for taxation were discussed in the first ever government-held tax summit Hong Kong is not on the EU blacklist with its commitment to comply with the international tax standards SMEs will benefit from the new two-tier profits tax system Hong Kong Government issued the Bill on BEPS actions 11 PwC

15 List of Transfer Pricing News Flashes issued in 2017 Hong Kong SAR Government s Roadmap following the outcomes of the BEPS Consultation Transfer pricing legislation comes to Hong Kong List of Hong Kong Financial Services Tax News Flashes issued in 2017 The proposed dedicated tax regime for aircraft leasing business in Hong Kong Bill on the concessionary tax regime for aircraft leasing considered by the Legislative Council The Hong Kong SAR Government has proposed to introduce Committee Stage Amendments to extend the concessionary tax regime to onshore aircraft leasing activities HKSAR Government s responses to key issues raised by deputations for Aircraft Leasing and Financing The Tax Bill on privately offered Hong Kong open-ended fund companies regime gazette Newly launched Northbound trading of Bond Connect calls for specific taxation regulation Private equity funds in Qianhai welcome new QFLP schemes List of International Assignment Services - Hong Kong Publications issued in 2017 Hong Kong: 2017/18 budget proposes changes to salaries tax Hong Kong: The IRD s recent comments on various salaries tax issues Hong Kong: The Court of Appeal s judgment on dependent visas for same-sex couples Hong Kong Tax Review

16 Contact list Our leaders Asia Pacific and Greater China Chairman Raymund Chao Head of Tax Mainland China, Hong Kong, Singapore and Taiwan Peter Ng China South and Hong Kong Tax Leader Charles Lee China South Tax Leader Jeremy Ngai Our tax contacts in Hong Kong Hong Kong Profits Tax / International Tax * Agnes Wong (Transportation and Logistics) * Florence Yip (Financial Services, Asset and Wealth Management) * Gwenda Ho (Technology, Media and Telecommunication) * Jenny Tsao (Corporate Tax and Retail and Consumer) *Jeremy Choi (Industrial Products) *KK So (Real Estate) *Rex Ho (Financial Services) * Suzanne Wat (Common Reporting Standards and Tax Reporting and Strategy) Accounting and Payroll *Peggy Cheng China Corporate Tax *Catherine Tsang (Real Estate) * Cathy Jiang (Transportation and Logistics) *Jeremy Ngai (Mergers and Acquisitions) Company Secretarial *Loretta Chan Customs / Duties Derek Lee +86 (755) Global Mobility *James Clemence Personal Financial Services *John Wong Tax Controversy *Kenneth Wong Tax Technology Ann Kwok Transfer Pricing Cecilia Lee *Colin Farrell Phillip Mak (Financial Services) US Tax Consulting *Wendy Ng Our Senior Tax Advisors in Hong Kong Anthony Tong David Smith Tim Lui Tiang & Co. # Legal David Tiang *Joseph Tse * Practice Unit/Industry Tax Leader # Tiang & Co. is associated with PwC Legal International Pte Ltd (a licensed Foreign Law Practice) in Singapore Tiang & Co. is an independent Hong Kong law firm. Neither Tiang & Co. nor PwC Legal International Pte Ltd has any control over, or acts as an agent of, or assumes any liability for the acts or omissions of, the other. 13 PwC

17 Our regional contacts Beijing Edwin Wong Changsha Collin Xiong Chengdu William Xu Chongqing Robert Li Dalian Rex Chan Guangzhou Ingrid Qin Hangzhou Jeffrey Qian / Jenny Chong jeffrey.qian@cn.pwc.com j.chong@cn.pwc.com Hefei Alan Yam alan.yam@cn.pwc.cn Hong Kong Charles Lee charles.lee@cn.pwc.com Jinan Edwin Wong edwin.wong@cn.pwc.com Kunming Ingrid Qin ingrid.qin@cn.pwc.com Macau Grace Cheung grace.cheung@hk.pwc.com +86 (10) (755) (28) (21) (10) (20) (571) (21) (21) (10) (20) Ningbo Ray Zhu ray.zhu@cn.pwc.com Qingdao Helen Zhang helen.h.zhang@cn.pwc.com Shanghai Alan Yam alan.yam@cn.pwc.com Shenyang Rex Chan rex.c.chan@cn.pwc.com Shenzhen Cathy Jiang / Charles Lee cathy.kai.jiang@hk.pwc.com charles.lee@cn.pwc.com Singapore Chris Woo chris.woo@sg.pwc.com Suzhou Mike Chiang mike.chiang@cn.pwc.com Taiwan Howard Kuo howard.kuo@tw.pwc.com Tianjin Kelvin Lee kelvin.lee@cn.pwc.com Wuhan Amanda Cao / Gang Chen amanda.f.cao@cn.pwc.com / gang.chen@cn.pwc.com Xiamen Minting Yu minting.yu@cn.pwc.com Xian Elton Huang / Jackie Zhao elton.huang@cn.pwc.com / jackie.zhao@cn.pwc.com +86 (21) (532) (21) (10) (755) (755) (512) (2) (10) (21) / +86 (20) (592) (21) / +86 (29) Nanjing Benny Zhang / Jane Wang benny.zhang@cn.pwc.com / jane.y.wang@cn.pwc.com +86 (25) / +86 (21) Zhengzhou Yu Bo bo.yu@cn.pwc.com +86 (10) Hong Kong Tax Review

18 In the context of this publication, China, Mainland China or the PRC refers to the People s Republic of China but excludes Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan Region. The information contained in this publication is of a general nature only. It is not meant to be comprehensive and does not constitute the rendering of legal, tax or other professional advice or service by PricewaterhouseCoopers Limited (PwC) or any other entity within the PwC network. PwC has no obligation to update the information as law and practices change. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PwC client service team or your other advisers. The materials contained in this publication were assembled in December 2017 and were based on the law enforceable and information available at that time. This publication is prepared by PwC National Tax Policy Services in Hong Kong and China, which comprises of a team of experienced professionals dedicated to monitoring, studying and analysing the existing and evolving policies in taxation and other business regulations in China, Hong Kong, Singapore and Taiwan. They support the PwC partners and staff in their provision of quality professional services to businesses and maintain thought-leadership by sharing knowledge with the relevant tax and other regulatory authorities, academies, business communities, professionals and other interested parties. 15 PwC

19 For more information, please contact: Matthew Mui Partner Tel: +86 (10) Fergus Wong Director Tel: Anita Tsang Associate Director Tel: Please visit our websites at (China Home) or (Hong Kong Home) for practical insights and professional solutions to current and emerging business issues. Hong Kong Tax Review

20 The materials contained in this publication were assembled in December 2017 and were based on information available at that time. The information contained in this publication is of a general nature only. It is not meant to be comprehensive and does not constitute the rendering of legal, tax or other professional advice or service by PricewaterhouseCoopers Limited or any other entity within the PwC network PricewaterhouseCoopers Ltd. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. HK C1.