Taxation on Hong Kong shipping companies, vessels and goods, and potential reforms

Taxation on Hong Kong shipping companies, vessels and goods, and potential reforms

Hong Kong Tax System Simple, transparent, straightforward Territorial source principle Hong Kong has: Profits tax, salaries tax, property tax Hong Kong does not have: Sales tax, VAT, withholding tax, capital gains tax, tax on dividends, estate tax

Tax on Hong Kong Companies Profits Tax Payable by every company carrying on a trade, profession or business in Hong Kong on profits arising in or derived from Hong Kong from that trade, profession or business Collected by Inland Revenue Department Two-tiered profits tax rate regime For companies: First HK$2 million profits: 8.25% Remaining profits: 16.5% For unincorporated business (e.g. partnership): First HK$2 million profits: 7.5% Remaining profits: 15% 3

Primary legislation: section 23B of Inland Revenue Ordinance (Cap. 112) Sets out when a shipowner has to pay or is exempted from paying profits tax Which shipowners are liable to Hong Kong profits tax: i. A shipowner incorporated in Hong Kong, or ii. A shipowner whose business is normally managed or controlled in Hong Kong, or iii. A shipowner to whom (i) and (ii) above do not apply, but its ship calls at any location in Hong Kong waters What if my ship only visits Hong Kong very infrequently? 4

Owners of non-hk-registered ocean-going vessels Have to pay profits tax if the ship calls at Hong Kong, earns freight from cargo uplifted or passages moneys from passengers embarking in Hong Kong, commences a towage in Hong Kong, or engaged in business of dredging in Hong Kong Owners of HK-registered ocean-going vessel Don t have to pay profits tax on freight, charter hire, passenger moneys or towages moneys if the ship goes to sea from Hong Kong Owners of vessels trading in Hong Kong waters Always have to pay profits tax Owners of vessels trading between Hong Kong and river trade limits Always have to pay profits tax River trade limits: Pearl River, Mirs Bay, Macao, other inland waters in Guangdong and Guangxi 5

Assessable Profits Assessable Profits = Relevant Sums Total Shipping Profits (worldwide) Total Shipping Revenue (worldwide) Relevant Sums Relevant Carriage shipped in Hong Kong Towage commenced in Hong Kong Dredging in Hong Kong Charter hire of a ship navigated mainly within Hong Kong waters 50% of charter hire of ship navigated between Hong Kong and river trade limits Charter hire for less than the whole of a ship 6

Assessable Profits Assessable Profits = Relevant Sums Total Shipping Profits (worldwide) Total Shipping Revenue (worldwide) Relevant Carriage The carriage by sea of passengers or goods, or both passengers and goods, as the case may be, but does not include the carriage of goods in transit 7

Assessable Profits Assessable Profits = Relevant Sums Total Shipping Profits (worldwide) Total Shipping Revenue (worldwide) Total Shipping Profits Profits from the shipowner s worldwide shipping operation Total Shipping Revenue Revenue from the shipowner s worldwide shipping operation 8

Assessable Profits Assessable Profits = Relevant Sums Total Shipping Profits (worldwide) Total Shipping Revenue (worldwide) Exempted Sums (i.e. sums exempted from Relevant Sums) Any relevant carriage shipped aboard a HK-registered ship at any location within the waters of Hong Kong and proceeding to sea from Hong Kong Any towage operation undertaken by a HK-registered ship proceeding to sea from any location within the waters of Hong Kong 9

Assessable Profits Assessable Profits = Relevant Sums Total Shipping Profits (worldwide) Total Shipping Revenue (worldwide) Losses Cannot generate tax losses from HK-registered ocean going ships as they do not attract profits tax Depreciation and Balancing Charges Depreciation allowance can only be claimed for the period during which the ship attracts profits tax 10

Assessable Profits Assessable Profits = Relevant Sums Total Shipping Profits (worldwide) Total Shipping Revenue (worldwide) Alternative method of calculation Commissioner of Inland Revenue may prescribe a percentage of the Relevant Sums as the profits tax payable Shipowner has 2 years to choose to re-calculate the tax based on the formula 11

Summary for carriage income Yes Tax exempted Relevant Carriage shipped in HK? Does the ship fly a HK flag? Yes No Is the ship proceeding to the sea from Hong Kong? Income assessable for tax No Income assessable for tax No Tax exempted 12

Summary for charter hire income Charter hire income from whole ship? Yes No Chartered ship navigating solely or mainly within HK waters? Chartered ship commencing voyage from Hong Kong waters? Yes Yes No Income assessable for tax Chartered ship navigating between HK and river trade limits? Deemed as income from Relevant Carriage Tax exempted Yes No 50% of income assessable for tax Tax exempted 13

Reciprocal Tax Exemption under s23b(4a) of Inland Revenue Ordinance Korea, New Zealand, Chile Double Taxation Agreement limited to shipping income Denmark, Germany, Netherlands, Norway, Singapore, Sri Lanka, United Kingdom, United States Comprehensive Double Taxation Agreements Austria, Belarus, Belgium, Brunei, Canada, Czech, Finland, France, Guernsey, Hungary, India, Indonesia, Ireland, Italy, Japan, Jersey, Korea, Kuwait, Latvia, Liechtenstein, Luxembourg, Mainland China, Malaysia, Malta, Mexico, Netherlands, New Zealand, Pakistan, Portugal, Qatar, Romania, Russia, Saudi Arabia, South Africa, Spain, Switzerland, Thailand, United Arab Emirates, United Kingdom, Vietnam 14

Comparison with Singapore Basic tax rate on company profits: Hong Kong: 16.5% (8.25% for first HKD 2 million profits) Singapore: 17% (8.5% for first SGD 300k (~HKD 1.73 million) profits) 15

Comparison with Singapore Tax exemptions for shipowners Carriage outside the territory by vessels registered locally Carriage outside the territory by vessels registered abroad Ocean-going carriage by vessels registered locally Ocean-going carriage by vessels registered abroad Hong Kong Exempted (territorial basis of taxation) Exempted (territorial basis of taxation) Exempted (s23b of IRO) Not exempted Singapore Exempted (s13a of ITA) Exempted for approved international shipping enterprise (s13f of ITA) Not exempted Exempted (s13a of ITA) 16

Comparison with Singapore Carriage within the territory by vessels registered locally Carriage within the territory by vessels registered abroad Charter hire by a vessel operating mainly within the territory Charter hire by a vessel operating outside the territory Hong Kong Not exempted Not exempted Not exempted Exempted (by definition of Relevant Sums in s23b of IRO) Singapore Not exempted Not exempted Not exempted Exempted for vessels registered locally (s13a of ITA); Exempted for vessels registered abroad for approved international shipping enterprise (s13f of ITA) An approved international shipping enterprise is one approved under the "Maritime Sector Incentive - Approved International Shipping Enterprise award (MSI-AIS)" 17

Comparison with Singapore Other incentive schemes in Singapore MSI - Maritime Leasing (MSI-ML) Award Ship or container leasing companies, business trusts or partnerships will enjoy tax concessions for up to 5 years on their qualifying leasing income under the MSI-ML award. An approved manager of the asset-owning entity will be awarded a concessionary tax rate of 10% on its qualifying management income.. MSI - Shipping-related Support Services (MSI-SSS) Award An approved MSI-SSS company will enjoy a concessionary tax rate of 10% on the incremental income derived from the provision of the following qualifying approved shipping-related support services for a 5-year renewable period: Ship broking; Forward freight agreement trading; Ship management; Ship agency; Freight forwarding and logistics services; and Corporate services rendered to qualifying approved related parties who are carrying on business of shipping - related activities. 18

Potential Reforms For Hong Kong, with 113.2 million GT in its register, there is only 27.3 million GT or 24% owned by Hong Kong principals By comparison, for Singapore, with 85.4 million GT in its register, Singapore principals own 41.2 million GT or 48% Hong Kong has had a successful track record of building its register. At the same time, however, Hong Kong lags behind in building its base of commercial principals Concessions could be provided for maritime and ship leasing management and maritime and shipping-related supporting services activities by reducing their standard tax rate on profits by half or setting it not higher than 8.25% 19

David Beaves david.beaves@incelaw.com Beijing Cologne Dubai Hamburg Hong Kong Le Havre London Marseille Monaco Paris Piraeus Shanghai Singapore