Hong Kong losing regional competitiveness by slow implementation of double taxation pacts

Yet signing a Canada-Hong Kong DTA would make Hong Kong a more attractive centre for investment.

Singapore is pulling ahead of Hong Kong in ensuring openness of cross national tax issues. 

A joint survey conducted by The Canadian Chamber of Commerce in Hong Kong (CCCHK) and Ernst & Young found that Canadian businesses and corporations overwhelmingly support the implementation of a Comprehensive Double Taxation Agreement (CDTA) between Hong Kong and Canada. 71% of respondents were “Supportive” or “Very Supportive” of implementing such a tax agreement.

Canada and Hong Kong launched the second round of negotiations for such a treaty on November 2. While this is encouraging, other negotiations have stalled in the past, leading to delays of more than 8 years in some instances.

Robert Cook, President of the CCCHK said, "Companies polled made it clear that they want a Canada-Hong Kong CDTA to provide greater clarity and more certainty in their tax situation when deciding to invest in Hong Kong.” Cook continued, “The Chamber supports the establishment of a CDTA as it will provide significant benefits to Hong Kong and to Canadian firms carrying on business in Hong Kong.”

The company surveyed saw the benefits accruing from a DTA as:

• Exempt surplus treatment (62%)
• Reducing withholding rates on interest (59%)
• Reducing withholding rates on dividends (54%)
• Reducing withholding rates on royalties (51%)
• Capital gains exemptions (54%)

Hong Kong is making up for lost time with 21 CDTA agreements currently signed, but still lags Singapore's total of over 60. A network of CDTA's would strengthen Hong Kong's positions the regional headquarters and financial center of choice for multinational companies operating in Asia, particularly in the face of competition from Singapore, according to a CCCHK report.

An agreement of this type between Canada and Hong Kong makes sense as their trade relationships are very important to each others’ economies. For the period of January to August 2011, Hong Kong ranks as Canada's 10th largest market valued at over CDN$1.8B. Canada ranks as Hong Kong’s 20th largest market with flows of over CDN$2.0B.

Patrick Cheung, Partner of Asia Pacific Financial Services Transfer Pricing Practice at Ernst & Young explains: "With such an important trading relationship, Hong Kong and Canada should establish a CDTA as soon as possible. With strong rule of law, Hong Kong is already a strong gateway for trade into Mainland China. Together with recent changes in tax laws in Mainland China, a CDTA between Canada and Hong Kong would further encourage Canadian business to locate in Hong Kong.”