AustCham calls for review of Hong Kong's tax base

In line with the 2015 Policy Address.

The Australian Chamber of Commerce Hong Kong & Macau (AustCham) has noted that it welcomes the opportunity to discuss the Hong Kong Special Administrative Region 2015 Chief Executive’s Policy Address and 2015-16 Budget.

According to a note from AustCham, it has several recommendations for the areas of focus for 2015-16.

For Hong Kong’s tax base, the note said that as indicated in the Consultation on 2015 Policy Address and 2015-16 Budget, Hong Kong’s tax base is narrow and government revenue is sensitive to economic fluctuations.

As such, AustCham has said that it would recommend a review of the existing tax base and consideration as to whether it is robust enough to address the fiscal needs of Hong Kong going forward.

A number of other jurisdictions have introduced their own measures including considering broader consumption type taxes, the note said.

AustCham said that it recognizes that any new taxes proposed for Hong Kong will require thorough consideration and public discussion, not least to ensure appropriate safeguards in place to protect the working class and welfare recipients.

Here's more from AustCham:

Preserving current tax base: In terms of preserving the current tax base, consideration of the OECD’s global initiatives on Base Erosion and Profit Shifting (“BEPS”) to address abusive tax arrangements would be desirable. At present, the Hong Kong Government has not committed to adopting any of the specific actions identified in the OECD’s its Action Plan on BEPS. Hong Kong is monitoring the debates and, as we understand it, likely to only adjust certain aspects of the Hong Kong tax systems in response to any new international norms.

The primary aim of the OECD’s initiatives is to realign global taxation with economic activities and value creation by creating international tax rules that specifically address BEPS, thus protecting tax bases and ensuring increased certainty and predictability for taxpayers and tax authorities.

Amongst other initiatives, we encourage the Hong Kong Government to make the necessary changes to its DTAs in order to adopt any change to the OECD tax treaty definition of permanent establishments to prevent abuse of the threshold allocating taxing rights for trading activities to different jurisdictions.

In respect of country-by-country reporting, most countries are in favour of the increased transparency this would bring. This would require multinational corporations to provide information by country on revenues, profits, income taxes paid and accrued, capital and accumulated earnings, employees and tangibles assets, as well as entity information on business activities. This would give Hong Kong sufficient information to conduct risk assessments and to guide the allocation of resources for taxpayer scrutiny and audit.

Many countries in the region are taking steps to tighten their transfer pricing rules, some in step with changes to the OECD transfer pricing guidelines, with most ASPAC jurisdictions also increasing their transfer pricing enforcement. Hong Kong does not have comprehensive Transfer Pricing legislation. As the IRD follows the OECD’s arm’s length principle, Hong Kong could look to implement legislation in line with the OECD changes to transfer pricing.

Implementing the OECD’s initiatives demonstrates Hong Kong’s commitment to being a responsible member of the international community with respect to fiscal matters and combating tax evasion. There is an increased expectation and demand for greater transparency in tax matters and there is an increased political focus on identifying and curtailing aggressive tax planning and practices.

Automatic exchange of information: Separately, the Government has agreed to implement the OECD’s Common Reporting Standard for Automatic Exchange of Financial Account Information in Tax Matters for the purpose of enhancing tax transparency and combating cross-border tax evasion. Governments will be able to obtain detailed account information from their financial institutions and exchange that information automatically with jurisdictions of residence of account holders on an annual basis.

However, current legislation in Hong Kong precludes the exchange of information other than on a request basis. In order to adopt and implement the Common Reporting Standard, appropriate legislation will be required. As such, stakeholder consultation, addressing policy and legal issues, and Legislative Council’s approval will be required in order to implement the appropriate legislation.

Given the anticipated commencement date of 2018, and the necessary agreements to properly implement the Common Reporting Standard and the administrative measures that will be required, the Government will need to stick to the anticipated two-year schedule in order to have the necessary legislation enacted.

Similarly, based on the current domestic legislation, Hong Kong is unable to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (“The Convention”) which allows automatic or spontaneous exchange information with other signatories and to conduct simultaneous tax examinations on multinational companies. Alternatively, this could also be achieved by renegotiating existing DTAs or signing amending protocols to reflect automatic or spontaneous exchange information.