The Asia-Pacific Journal of Taxation (APJT) is a joint effort between the Taxation Institute of Hong Kong and the School of Accounting and Finance of The Hong Kong Polytechnic University.
It publishes research papers, commentary notes, book reviews and articles that address significant issues in the field of taxation relevant to Hong Kong, China and the Asian Pacific region.
The APJT aims to provide quality service to the readership by making its content ore informative and thorough, and by striking a proper balance between professionalism and intellectual stimulation.
The APJT normally publishes two issues every year.
On 12 March 2019, the European Commission removed Hong Kong from the European Union’s watchlist on non-cooperative tax jurisdictions. This came in light of a series of changes Hong Kong has made to enhance tax transparency and combat cross-border tax evasion.
The European Union’s list defines three criteria for good governance, namely transparency, fair tax competition, and commitment to implementing the four minimum standards under the Base Erosion Profit Shifting (BEPS) Project of the Organisation for Economic Cooperation and Development (OECD). In term of transparency, Hong Kong has signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which entered into force on 1 September 2018, to allow Hong Kong to effectively implement the automatic exchange of financial account information in tax matters (AEOI) and the BEPS package. Furthermore, two amendment bills have been passed to amend the tax regimes in respect of corporate treasury centres, professional reinsurance, captive insurance, offshore funds, and offshore private equity funds. Tax concessions have now been extended from non-domestic transactions to domestic transactions to ensure fair competition.
Since the Legislative Council resumed its meeting last October, seven amendment bills concerning the Inland Revenue Ordinance have been passed in six months. These changes range from enhancing Hong Kong’s competitiveness and technological development to promoting the wellness of the community.
To promote domestic research and development (R&D) activities, the Inland Revenue (Amendment) (No. 3) Bill 2018 was passed on 24 October 2018 to introduce a two-tiered tax deduction rate regime which allows a deduction of up to 300% for payments made to designated local research institutions for qualifying R&D activities and qualifying expenditures incurred by the enterprises. During the legislative process, there were submissions that the requirement for the R&D activities to be wholly undertaken within Hong Kong in order to qualify for the enhanced tax deductions was too restrictive. However, the Government reiterated that the key policy objective of the bill was to encourage enterprises to conduct R&D activities within Hong Kong and groom local R&D talent. Relaxing the restrictions would be contrary to the policy objective.
One week later, the Inland Revenue (Amendment) (No. 4) Bill 2018 was passed to give a concessionary deduction under salaries tax and personal assessment for qualifying premiums paid by a taxpayer under a Voluntary Health Insurance Scheme up to a maximum of $8,000 for each insured person, who could be the taxpayer or any specified relative of the taxpayer.
The Inland Revenue (Amendment) (No. 5) Bill 2018 was passed on 14 November 2018. The bill has effected the following amendments:
- married persons to have the flexibility to elect for personal assessment on his/her own or together;
- one-off deduction allowed for capital expenditure on environmental protection installations; and
- the 100% tax concession on interest receipts and profits from the disposal of debt instruments to be extended to cover debt instruments of any maturity and to include debts instruments which are listed on the Stock Exchange of Hong Kong (a relaxation from the requirement of being lodged with and cleared by the Central Moneymarkets Unit of the Hong Kong Monetary Authority).
The latter is expected to incentivise the use of Hong Kong as a platform for bond investing and trading and to enhance Hong Kong’s competitiveness as an international financial centre.
On 30 January 2019, Inland Revenue (Amendment) (No. 6) Bill 2018 was passed to clarify the profits tax treatment of loss-absorbing capacity debt instruments.
In Nice Cheer Investment Limited v. CIR , the Court of Final Appeal ruled that the word “profits” under section 14 connotes actual or realised, and not potential or anticipated, profits and neither profits nor losses may be anticipated. Hence, the unrealised gains resulting from revaluation of trading securities held at the end of the accounting period, as required by accounting standards, are not chargeable to profits tax. The Inland Revenue Department has adopted an interim administrative measure to accept profits tax filing on a fair-value basis for the years of assessment 2013/14 to 2017/18. Not until 2 November 2018 had the Inland Revenue (Amendment) (No. 7) Bill 2018 been gazetted to codify the interim administrative measure, which was passed by the Legislative Council on 20 February 2019. Under this Amendment Ordinance, a taxpayer can elect to align the tax treatment of financial instruments with their accounting treatment for assessing the profits if the financial statements are prepared in accordance with HFRS 9, IFRS 9, or a financial reporting standard adopted by another jurisdiction which is, in the Commissioner’s opinion, equivalent to IFRS 9.
This Amendment Ordinance has also effected the following changes:
- inclusion of an export credit agency which is owned by, or is established and operated by, a governmental entity outside Hong Kong as an “overseas financial institution” for the purpose of interest expense deduction under section 16(1)(a);
- refinement of the provisions that implement the AEOI, clarifying the meanings of certain concepts while removing five categories of institutions from the list of non-reporting financial institutions;
- modification of the application of section 8(1A)(b) to avoid double non-taxation, such that a Hong Kong resident who derives income as a visiting teacher or researcher in a territory with which Hong Kong has concluded double taxation arrangement (which provides for tax exemption in respect of such income) would be eligible for exemption under section 8(1A)(b) only if tax is paid or payable in that territory; and
- revision of the meaning of brother or sister in section 30B to align with the meaning of siblings in the new section 26J.
The Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Bill 2018 was also passed on the same day. All privately offered onshore and offshore funds operating in Hong Kong can now enjoy profits tax exemption for their transactions in specified assets subject to meeting certain conditions, regardless of their structure, their size, or the purpose that they serve. An eligible fund can also enjoy profits tax exemption from its investment in both overseas and local private companies. The amendment thus not only addressed the concerns of the European Union over the ring-fencing features of Hong Kong’s tax regimes for privately offered offshore funds but also incentivised funds to be domiciled and managed in Hong Kong, which in turn could drive demand for other professional services, including legal and accounting services.
Finally, the Inland Revenue and MPF Schemes Legislation (Tax Deductions for Annuity Premiums and MPF Voluntary Contributions) (Amendment) Bill 2018 was passed one month later on 20 March 2019. Taxpayers are entitled to tax deductions under salaries tax and personal assessment for premiums paid to qualifying deferred annuities and contributions made to tax deductible Mandatory Provident Fund voluntary contribution accounts. The maximum deduction is $60,000 each year starting from the year of assessment 2019/20.
In this issue of the Journal, readers will, as usual, find a variety of articles contributed by authors from Hong Kong and overseas. In the Hong Kong Technical column, three articles examine some topical issues arising from two amendment ordinances enacted in 2018. These issues include the controversies over the new legislation on deduction of intellectual property rights, the concept of permanent establishment, and the cost of information under the new transfer pricing regime. Crossing the border, another article investigates the management of customs and trade in Mainland China in the new era. The article in the Belt and Road column discusses the tax factors that contribute to the success of Mauritius as a preferred investment jurisdiction. In the International column, one article shares the best practices for dealing with rising global tax controversy as governments worldwide are collaborating on information sharing at a rapid pace; another article reviews the increased tax litigation and pendency of appeal cases in Pakistan.
We would like to express our heartfelt thanks to the authors for contributing these insightful articles. Our special thanks go to the reviewers for their valuable comments. Last but not least, we wish to thank our readers for their continued support. We hope you will enjoy reading the Journal. We welcome any comments and suggestions to improve its content and quality. Remember, the Letter to the Editors column is for you to voice your views and suggestions on any tax matters, be they policy issues or practical matters. We need your support for this column.
The Joint Editors