This interview was originally featured on December 18, 2018.
Taxlinked (TL): PricewaterhouseCoopers LLP and the World Bank recently released a study that says Hong Kong has the most business-friendly tax system in the world. What has specifically contributed to this achievement?
Belinda Wong (BW): Tax filing and collection are simple. Tax returns are issued on an annual basis. Profits tax returns must be filed normally within 3 months after the issue of the returns unless the fiscal year end is either December or March, which has filing due dates in August and November, respectively.
With respect to the filing of profits tax returns, if the return shows losses, the Inland Revenue Department (IRD) will not call for submissions of the profits tax return on an annual basis. The next return is usually issued in 3 years’ time. The company also has the responsibility to notify the IRD when its business derives profits. If a company has taxable profits, it is required to pay provisional tax and tax for final assessment. The provisional tax is a way to pay the tax in advance in order to avoid the taxpayer facing a huge tax debt.
The same arrangement also applies for salaries tax for individuals under employment. Salaries tax returns are usually issued to employers around April or May each year. Individuals have to file their own salaries tax returns. Filing should be done within one month upon receipt of the tax return form from the IRD. Salaries tax is charged at progressive rate.
There is no sales tax, no capital gain tax, no inheritance tax nor withholding tax. 0.2% is payable on the transfer of shares or landed properties, which is calculated on the higher of the net asset value or consideration paid.
If the taxpayer disagrees with the provisional tax amount reasoning that the profits or income will be much lower in the subsequent tax year, an application for holdover of the provisional tax can be made. With respect to individuals having employment and business income (being a sole proprietor or partner of a business) or owner of landed properties, personal assessment combining all the incomes can be elected. The election is at the discretion of the taxpayer. Married couples can also elect for personal assessment. This would enable the taxpayer to maximise the benefits of the deductible allowances applicable to his or her case.
IRD has introduced an eTax for which a taxpayer can create an account and submit various tax returns. Employers can also submit returns on the remuneration and emoluments paid to each employee through this online system.
TL: How do you see the recently signed double tax agreement between India and Hong Kong contributing to the local economy?
BW: The HK taxation regime of Hong Kong is on territorial basis, i.e., profits or income derived in HK are taxable while those derived outside of Hong Kong are non-taxable. Only expenses related to taxable profits or income are deductible. Historically, HK residents do not suffer from double taxation. Many countries that have global taxation also offer their residents carrying on business in HK unilateral tax credit relief on the tax paid with respect to profits or income, and HK tax authority also allows tax deduction to minimize the tax burdens of those foreign residents or businesses.
As double taxation treaty arrangements help remove trade barriers to facilitate and enhance the flow of trade, the HK Special Administrative Region Government (HKSARG) has been working hard to cement tax treaties with the active trading partners. These treaties clarify to the investors their potential tax liabilities of economic activities and define the taxing rights of the respective parties to the treaties. They help boost the economic activities of our trading partners here.
The tax treaty with India was entered with the above objectives. As India is the 6th largest economy of the world, businesses around the globe are now showing keen interests expanding thereto. The tax treaty could boost the interests of HK businesses in India and vice versa.
TL: A year ago, Hong Kong’s government introduced a two-tiered profits tax rate regime. How does this regime work? And how effective has this been in attracting new businesses and strengthening the local economy?
BW: In the 2018-19 fiscal year, tax initiatives have been introduced and resources allocated with the objectives of turning HK into a technology and innovation hub:
- Two-tier corporate tax system is introduced to charge 8.25% on the first HK$2 million profits and the balance 16.5% to increase the competitiveness of the small-to-medium-sized enterprises and startups;
- Two-tier tax deduction system for research and development expenses, i.e., 300% tax deduction for the first HK$2 million and 200% for the remaining amount provided that the activities are undertaken in HK and if they meet with the research and commercial application criteria;
- HK$10 billion to the Innovation and Technology Fund to support applied research and development;
- HK$10 billion to establish two research clusters on healthcare technologies and artificial intelligence/robotics technologies;
- HK$10 billion to the Science and Technology Park (HKSTP) for its facility upgrade and enhanced support to enterprises and startups;
- HK$200 million to Cyberport for its services to startups and another HK$100 million to develop e-sports.
Talent is the key to success! More emphasis will be placed on science, technology, engineering and mathematics (STEM) education. Collaboration with overseas renowned institutions will be made to enhance the research and development capability, e.g., MIT has set up a HK Innovation Node and Harvard University and University of HK will jointly set up a lab for precision medicine tools. At the same time, the Hong Kong Design Centre is tasked to work with the Government and the private sector to enhance the design and creativity of the community. Incubation programmes have also been introduced to boost the standards and visibility of the designers.
Postdoctoral Hub Programme has just been introduced in August 2018 to provide monthly allowance to each postdoctoral talent. Companies can also apply for funds to support their staff training in technology.
There is a boom in startups and startup groups both locally and from overseas. Incubators are everywhere. Fintech, insurtech and disruptive technologies are springing up. The HK Monetary Authority is expected to issue several virtual banking licences in the early part of 2019.
TL: Over the past few years, the number of family offices or private investment vehicles has grown in Hong Kong. What has led to this growth?
BW: Asia is the investment region with lots of foreign investments. HK is the hub of Asia with its geographical position within four hours flight to the neighboring cities. Added to the geographical location are the free flow of capital and simple tax system, which set HK as the top priority city for family offices and multi-national companies to set up headquarters here.
TL: Is there anything else you would like to share with your fellow members?
BW: The Hong Kong-Shenzhen Innovation and Technology Park in the Lok Ma Chau Loop, an 87 hectares project agreed upon between HK and Shenzhen in 2017 to be developed and managed by the HKSTP. This project will create 1.2 million square metres of additional office space. When completed, it will be the largest business technology park in the region and a significant incubator for startups. HK$20 billion has been allocated to develop the first phase of this project.
President Xi Jinping has pledged to make HK a global innovation hub by directing national funding to be available to scientists in HK.
The HK-Zhuhai-Macao bridge and the high-speed train linking HK and the Mainland through Shenzhen are now fully operational. HK is more closely linked with the other cities of the Mainland. This could further facilitate economic activities among the cities.
Collaboration is not only happening on the governmental levels. Some business associations, notably the Smart City Consortium, have also been pushing hard on worldwide collaboration. It has signed memorandum of understanding with more than 12 countries and regions to work toward the realization of Smart City together. The HKSARG also welcomes private public partnership on projects to transform HK as a Smart City.
HK is expected to achieve high in terms of technology and innovation!