Hong Kong Institute of CPAs
Preparing for a complex future The Taxation Faculty’s 2020
CONTENTS
A Plus issue
Topic
Page
Foreword
1
January 2020
Court of Final Appeal decision on employee payments
2-4
January 2020
Is paying taxes easy?
5-7
February 2020
Economic substance law – the British Virgin Islands
8-10
March 2020
Paying taxes in China
11-13
April 2020
IRD issues guidance on cryptocurrency taxation
14-15
April 2020
Reviewing the OECD’s COVID-19 analysis
16-17
April 2020
Massive U.S. tax relief act to combat economic fallout from COVID-19
18
May 2020
Revised DIPN 39 raises controversies over an apparently inconsistent application of the source principles
19-21
June 2020
Roundtable discussion: Navigating China’s tax system Experts discuss China tax matters at the China Taxation Conference
22-27
June 2020
Taxation of charities
28-29
July 2020
A summary of the taxation of offshore indirect transfers toolkit
30-32
July 2020
A new limited partnership fund regime for Hong Kong
33
August 2020
Second opinions: What are the key tax considerations for an M&A transaction?
34-35
August 2020
IRD issues revised practice note explaining the tax treatment of financial instruments under HKFRS 9
36-37
August 2020
Hong Kong revises DIPN on APAs to help manage tax uncertainties
38-40
September 2020 Proposed tax concession for carried interest
41
September 2020 Roundtable discussion: Rules are changing: Will Hong Kong stay competitive? Experts discuss tax strategies at the Institute’s virtual Annual Taxation Conference
42-47
September 2020 Upfront lump sum spectrum utilization fees held as capital in nature and not deductible
48-49
October 2020
Leadership Profile: Moving on up Curtis Ng, Regional Tax Partner-in-Charge, Northern Region, at KPMG China
50-55
October 2020
Views exchanged during the 2020 annual meeting with the IRD
56-58
October 2020
The interaction of the accounting standards with the tax laws – HKFRS 15 and HKFRS 16
59-61
November 2020
An overview of the OECD’s Base Erosion and Profit Shifting 2.0 Pillar One blueprint
62-64
November 2020
An overview of the OECD’s Base Erosion and Profit Shifting 2.0 Pillar Two blueprint
65-67
December 2020
Examining the new DIPN covering ship leasing and management tax concessions
68-70
Article contributors
71-89
Foreword Welcome to this collection of articles from the Hong Kong Institute of Certified Public Accountants’ monthly magazine A Plus in 2020, contributed by or featuring members of the Institute’s Taxation Faculty. The theme of the yearbook, Preparing for a more taxing future, is demonstrated through the wide coverage in the articles, which also represent the diverse responsibilities of the Taxation Faculty. The Taxation Faculty brings together the tax activities and programmes run by the Institute. These are primarily the technical, advocacy and liaison work as well as member services such as seminars, networking events, and a regular e-newsletter. The Taxation Faculty helps raise the profile of the taxation profession in Hong Kong and provides a stronger voice for members working in this field. It also offers a platform for the further development of high-quality tax services under the Institute. The faculty also lends support to other Institute initiatives, such as the advanced diploma in specialist taxation. The Taxation Faculty welcomes both Institute members and non-members to join. More information about the faculty can be found here. 2020 was a year of disruption due to the COVID-19 pandemic. Most of the world was focused on the task of battling the pandemic, with the attention of governments, businesses and individuals understandably concentrated on the disease, and on impeding its spread and mitigating its impact as much as possible. Governments mobilized unprecedented resources to support their locked-down economies and acquire the equipment and supplies health systems needed and, more recently, the vaccines essential for their populations. Businesses faced disruption to operations and customer demand, and had to adapt to the challenging times. Individuals were locked down, working from home or facing unemployment, or even their own personal battles with the virus. The pandemic has transformed economies. Coming at a time of continuing digital transformation of the economy, the pandemic has hastened the usage of new technologies, giving an unexpected boost to their providers, and also increased the economic power of the multinational enterprises that control much of the digital economic activity. The question of how governments tax these enterprises, and how businesses structure their activities are growing in importance, especially with the need to eventually pay back all the extra government spending on fighting the pandemic. This is why the work of the Organization for Cooperation and Development/ G20 Inclusive Framework on Base Erosion and Profit Shifting 2.0 initiative on the tax challenges arising from digitalization is so important. The release of the two blueprints in October 2020 will likely have significant impacts on tax systems across the world, including Hong Kong, and will be a focus of the Taxation Faculty going forward. This yearbook includes a number of articles on the initiative. Many in the taxation specialization in Hong Kong work advising Mainland-based companies or on Mainland taxation. The yearbook also covers this topic, and how taxation is developing in China. We hope you enjoy these articles, and continue to read A Plus to keep up to date with the latest developments in in Hong Kong and cross-boundary taxation.
1
Court of Final Appeal decision on employee payments A look at why the benefits given to an employee were not for past services but were related to other matters
The case of Commissioner of Inland Revenue v. Poon Cho-ming John [FACV 1/2019] hinged on the fact that the payment for “something else” was essentially for the employee agreeing: not to take any course of action that might create unfavourable publicity for the employer; not to pursue threatened legal claims against the employer; and to simply “go away quietly.”
Brief facts Under an employment contract dated 20 October 1999 (the service agreement), the taxpayer was employed by a Bermuda company (the company), which was listed on the Stock Exchange of Hong Kong, as group chief financial officer (group CFO) and an executive director of the company. The service agreement was terminable by either party serving to the other a 6-month written notice. Circumstances leading to the immediate termination of the service agreement on 20 July 2008 On Friday afternoon, 18 July 2008, the chairman of the company informed the taxpayer that the company was going to terminate the service agreement immediately and remove him from his directorship positions of the group, including that of the company. The taxpayer was taken aback. His mood was combative, and he refused to go quietly. The taxpayer was of the view that even though the company could terminate his employment as group CFO, this was not the case with his position as executive director of the company and January 2020
other group companies. The taxpayer then threatened to take a two-pronged course of action. Firstly, he proposed to challenge the chairman’s plans to remove him from his directorships by taking the matter to the shareholders with a view to delay his departure from the board, contrary to the wishes of the chairman and a majority of the company’s board of directors. Secondly, the taxpayer was also prepared to take his claims to court, which would attract interest from the media, with consequential market reaction. Although the parties were in an acrimonious relationship, after a weekend of negotiations involving lawyers on both sides, they eventually agreed to the terms for the termination of the service agreement, by way of a separate written agreement (the separation agreement). Payments and benefits made to the taxpayer under the separation agreement Under the separation agreement, the taxpayer was to be paid, in addition to payment in lieu of six months’ notice and various other sums, a “payment in lieu of a discretionary bonus for the financial year ended 30 June 2008 – EUR 500,000” (sum D). Furthermore, the separation agreement also provided that the vesting dates in respect of three tranches of options in the shares of the company, which were granted to the taxpayer under his terms of employment, were accelerated to the date of the termination of the service agreement on 20 July 2008. These options were duly exercised
by the taxpayer resulting in notional gains of HK$43,250,400, calculated for tax purposes as being the difference between the market value of the shares on the date of exercise and the exercise price (the share option gain). The taxpayer accepted that the sums and benefits to be given to him under the separation agreement were in full and final settlement of all claims and rights of action (whether under statute, common law or otherwise).
Issue in dispute The Commissioner of the Inland Revenue (CIR) determined that sum D and the share option gain were “income from employment” chargeable to Salaries Tax in Hong Kong. On appeal, the tax tribunal of the Board of Review (BOR) and the Court of First Instance (CFI) upheld the CIR’s assessment of sum D and the share option gain. The Court of Appeal (CoA) however reversed the BOR’s and CFI’s decision and held that both sum D and the share option gain were not chargeable to Salaries Tax in Hong Kong. The CIR then appealed the CoA’s decision to the Court of Final Appeal (CFA).
Decision of the Court of Final Appeal Legal test for determining what constitutes “income from employment” In this regard, Mr. Justice Bokhary NPJ, delivering his judgement in this case, referred to an earlier decision of the CFA 2
held in Fuchs v. CIR (2011) 14 HKCFAR 74. In Fuchs, Ribeiro PJ stated that (and all other CFA judges on that panel agreed): “…Income chargeable [under section 8(1) of the Inland Revenue Ordinance] … embraces payments made… ‘in return for acting as or being an employee,’ or… ‘as a reward for past services or as an inducement to enter into employment and provide future services.’ If a payment, viewed as a matter of substance and not merely form…is found to be derived from the taxpayer’s employment in the abovementioned sense, it is assessable…” “It is worth emphasizing that a payment which one concludes is ‘for something else’ and thus not assessable, must be a payment which does not come within the test…” “In situations [where taxpayers claimed that the payment fell outside the charge because it was not made in return for their acting as or being an employee but as a consideration for abrogating their rights under the contract of employment]… such a conclusion may be reached where the payment is not made pursuant to any entitlement under the employment contract but is made in consideration of the employee agreeing to surrender or forgo his pre-existing contractual rights…” Sum D and the acceleration of the vesting dates of the relevant options were given to the taxpayer “for something else”, and therefore were not income from employment chargeable to tax Applying the above legal test to the facts and evidence of this case, Mr. Justice Bokhary NPJ held that (and all other CFA January 2020
judges on the panel agreed) both sum D and the acceleration of the vesting dates of the relevant options leading to the share option gain were “not given to reward the taxpayer for past services. [Sum D and the share option gain] were plainly given for something else, being part of what was given to make the taxpayer go away quietly. In so far as it may be appropriate to approach the present case by reference to abrogation, it is to be observed that the separation agreement abrogated whatever rights the taxpayer may have had under his contract of employment and that he acquiesced in such abrogation in return for what was given to him to make him go away quietly…” As such, and essentially endorsing the reasons given by the CoA for its decision, the CFA upheld the CoA’s decision that both sum D and the share option gain were not chargeable to Salaries Tax in Hong Kong. Before making the above conclusion, Mr. Justice Bokhary NPJ had considered but rejected the CIR’s argument for the taxability of sum D and the share option gain on the following grounds. Rejection of sum D being taxable under the substitution test Counsel for the CIR argued that sum D, being “in lieu of a discretionary bonus” was taxable under the “substitution test” as explained by Lord Woolf in Mairs v. Haughey [1994] 1 AC 303. Counsel argued that “[t]he payment of a sum [i.e., sum D] in true substitution of another [i.e., a discretionary bonus which the taxpayer would have received if the service agreement had not been
terminated] is an acknowledgement and takes the place of, and has the same nature as, the latter [i.e., the discretionary bonus].” In other words, the nature of sum D should be the same as the discretionary bonus which would otherwise have been taxable had it been received by the taxpayer. Rejecting Counsel’s argument on the point, Mr. Justice Bokhary NPJ considered that sum D was paid “in lieu of a discretionary bonus” only in form but not in substance. As such, sum D was not paid in true substitution of a discretionary bonus and, thus, the “substitution test” did not apply. Looking at the substance of sum D, Mr. Justice Bokhary NPJ noted there was no evidence that the financial results of the company for the year ended 30 June 2008 were considered in determining the amount of sum D. Nor was the work performance of the taxpayer for the year considered. These two factors were normally the substance when a discretionary bonus was considered and awarded. Instead, the evidence was that the company told the Inland Revenue Department that: (i) the taxpayer was not awarded any bonus for the financial year ended 30 June 2008; (ii) Sum D was an “entirely arbitrary amount mutually agreed by the taxpayer and the chairman; and (iii) Sum D was paid to “eliminate any claim for unpaid bonus.” Rejection of the share option gain being taxable on grounds that the options were granted while employed Rejecting Counsel’s argument on this point, Mr. Justice Bokhary NPJ noted 3
that the “acceleration in question was not acceleration of the time when the taxpayer would receive something which he would receive, albeit later, even without any acceleration. It was acceleration without which he would never have received that thing at all [i.e., the options would otherwise lapse if the acceleration was not made]. On the evidence and the facts found, it is plain that the acceleration of the vesting leading to the share option gain was not given to reward the taxpayer for past services. It was, on the evidence and the facts found, plainly given for something else…”
Commentary It is of note that both the BOR and all level of courts adopted the same legal test quoted above for determining whether sum D and the share option gain were income from employment. However, when applying the legal test to the facts and evidence of the case as found, the BOR and the CFI held that sum D and the share option gain could not be said to be paid “for something else” other than past services of the taxpayer. This is apparently because both the BOR and CFI did not consider the taxpayer had any valid claims against the employer under his employment contract. Specifically, both the BOR and CFI considered that given that the company had already separately made a payment in lieu of six months’ notice to the taxpayer, the service agreement was lawfully terminated by the company without the company breaching any terms of the service agreement. Furthermore, both the BOR and CFI also January 2020
considered that, under the terms of his employment, the taxpayer was obliged to resign from the directorships of the group upon the termination of the employment. The BOR had also earlier rejected the taxpayer’s claim that he had a right to put the removal of his directorships of the group to the vote of the shareholders of the company under the relevant Bermuda legislation or the by-laws of the company. Based on the above, both the BOR and the CFI did not consider that the taxpayer had abrogated or surrendered any rights under the service agreement. Viewing the matter in this light, apparently both the BOR and the CFI did not consider that the taxpayer’s threatened two-pronged course of action against the company amounted to much of “something”. The CoA and the CFA, however, viewed the matter differently, considering that the taxpayer dropping his threatened two-pronged course of action against the company, and agreeing to go away quietly, did amount to quite “something”. Interestingly, Mr. Justice Bokhary NPJ also noted in his CFA judgement in the case that as “to claims and rights of action under statute, there was the possibility of a remedy available to the taxpayer under the Employment Ordinance (Cap. 57) if there was no valid reason for his termination”. That may also explain why Mr. Justice Bokhary NPJ also tried to reconcile the “for something else” line of reasoning with the reference to that of “abrogation.” As illustrated in this case, the application of the legal principles for determining the taxability of payments or benefits given upon termination of
employment is by its nature complicated. Furthermore, the terms and evidence of how termination payments or benefits were negotiated and agreed between the employer and the employee had a bearing in determining the taxability of such payments or benefits. Where necessary, employers and employees should seek professional tax advice.
This article was contributed by Tracy Ho, Asia-Pacific Business Tax Services Leader at EY; Patrick Kwong, Executive Director, and Kathy Kun, Senior Manager, of Ernst & Young Tax Services Limited. 4
Is paying taxes easy? Governments worldwide increasingly compete through tax reforms. This article examines the methodology of the World Bank Group’s Paying Taxes study and Hong Kong’s ranking in it Governments have been increasingly focused on improving the business environment, especially for small- and medium-sized enterprises which account for the majority of businesses worldwide. To capture these reform efforts, the World Bank Group publishes an annual Doing Business report to measure the regulations that enhance (and constrain) business activities across 190 economies from 11 perspectives. Doing Business 2020 is available now. “Paying Taxes” is probably the more detailed among the 11 perspectives. To help governments and taxpayers better understand how the Paying Taxes performance indicators are calculated and compared, the World Bank Group publishes a separate Paying Taxes report. Paying Taxes 2020 provides a comparison of the paying taxes environment for the calendar year ended 31 December 2018.
• A medium-sized domestic manufacturing company that performs general industrial or commercial activities, with some specific transactions, including a land transfer transaction. • 100 percent domestically owned and not participating in foreign trade. • Assessed in its second year of operation, with the first year making loss and the second year profitable. • The key parameters of the company (e.g. start-up capital, turnover, etc.) are calculated using multiples of gross national income per capita of each country released by the World Bank Group so that the size of the company is relevant to each economy. • In order to reflect the tax environment for general manufacturing companies, the case study company does not qualify for any incentives or benefits apart from those related to its age or size.
Purpose and objectives of Paying Taxes study
The four indicators
The main purpose and objective of Paying Taxes is to identify good tax practices, raise awareness of all of the taxes contributed by companies, enable benchmarking of the tax systems on a like-for-like basis, and provide information to help policy decision making and tax reform. Following this purpose, the World Bank Group developed a methodology to measure the global ease of paying taxes. As one of the data providers and co-publisher of the report, PwC has a deep understanding of the Paying Taxes methodology.
The case study company To allow a like-for-like comparison of the ease of paying taxes in different economies, all economies covered by Paying Taxes use the same “case study company” with the same set of assumptions: January 2020
Paying Taxes uses four indicators to measure the tax costs and tax compliance burdens of the case study company in each economy, detailed below using Hong Kong’s data and the global average as an illustration. All data is sourced from the Paying Taxes 2020 report. 1. Total tax and contribution rate (TTCR) measures the amount of taxes and mandatory contributions borne by the case study company, as a percentage of its commercial profit in its second year of operation. The lower the TTCR, the less tax and contribution burden for the case study company. The taxes and contributions include common taxes and mandatory contributions borne by the case study company, such as corporate income tax (CIT), social security contributions and housing provident fund borne by the employers, property tax, real estate tax, etc. TTCR includes social security
contributions and housing provident fund to reflect like-for-like comparison, as they are mandatory taxes in many economies and do affect the accounting profits of the business. The taxes and contributions withheld but not borne by the company, such as individual income tax (IIT), social security contributions borne by the employees, and valueadded tax (VAT) borne by the end consumers are excluded. Commercial profit is the profit before all taxes and contributions borne, which is computed as income (including sales income, capital gains and interest income, if any) minus cost of goods sold and minus expenses (including salaries, administrative expenses, interest expenses, provisions and deprecation). It differs from the conventional accounting concept of profit before tax. So TTCR is different from statutory tax rate or effective tax rate that we are familiar with. Applying the statutory tax rates in its jurisdiction, TTCR reflects the total tax burden of the case study company conducting the business activities under the assumptions, divided by the commercial profit, which is designed to provide a measure of how much tax and contribution costs that the case study company bears to earn every dollar. Table 1 is a simplified example included in the report illustrating how to calculate the TTCR. Table 2 on p.44 calculates the TTCR of the case study company in Hong Kong and global average. 2. The number of payments reflects the total number of payments of taxes and contributions. It includes all taxes and contributions that are traditionally collected and paid by the case study company. Therefore, in addition to the taxes and social security contributions borne by the company itself, VAT, IIT and employee-borne social 5
Table 1: How to calculate the total tax contribution rate (TTCR) TTCR example
Currency thousands
Formula
Profit before tax
1,000
[A]
Add back above-the-line taxes borne
275
[B] = [C]+[D]+[E]
Social security contribution
235
[C]
Property tax
25
[D]
Vehicle tax
15
[E]
Commercial profit (i.e. profit before all taxes borne)
1,275
[F] = [A]+[B]
Corporate income tax
220
[G]
Total taxes borne
495
[H] = [G]+[B]
Profit after tax
780
[I] = [A]-[G]
TTCR=total taxes borne/ commercial profit
38.8%
[J] = [H]/[F] = [K]+[L]+[M]
Profit tax TTCR = 220/1,275
17.3%
[K] = [G]/[F]
Labour tax TTCR = 235/1,275
18.4%
[L] = [C]/[F]
Other taxes TTCR = 40/1,275
3.1%
[M] = ([D]+[E])/[F]
security contributions also add to the administrative burden and are included in the number of payments indicator. Where electronic filing and payment is allowed and used by the majority of medium-sized businesses, the tax is counted as paid once a year even if filings and payments are more frequent. Where two or more taxes or contributions are filed and paid jointly using the same filing form, these joint payments are counted as one. The number of payments in Hong Kong is three times per year since the case study company is required to pay once a year for profit tax, Mandatory Provident Fund contributions and rates respectively. The global average was 23.1. 3. Time to comply. How easy to pay tax is not just about the amount of tax paid and number of tax types. It also concerns the compliance and administrative January 2020
requirements. The report measures in hours per year the time taken to prepare, file and pay three major types of taxes and contributions, i.e. CIT, VAT, and labour taxes (including IIT, social security contributions and housing provident fund). Preparation time includes the time to collect and analyse all information necessary to compute the tax payable. Time spent maintaining systems, mandatory tax records and VAT invoices is also taken into account. Filing time includes the time to complete all necessary tax return forms and file the relevant returns at the tax authority. Payment time considers the hours needed to make the payment. This indicator is directly related to the ease of filing and paying taxes, the use of digital technology for tax administration, etc. Table 3 on p.44 shows the data for
Hong Kong and global average. 4. Post-Filing Index is a supplement to the aforementioned three filing-related indicators. It measures certain processes that might take place after a tax return has been filed as there could be complex interactions between taxpayers and tax authorities in many economies to agree the final tax liabilities. The Post-Filing Index is based on four components: 1) The time to apply for a VAT refund (in hours); 2) The time to obtain the VAT refund (in weeks); 3) The time to comply with a CIT correction after the annual CIT filing (in hours); and 4) The time to complete a CIT correction, including dealing with any potential reviews such as tax audits (in weeks). 1) and 2) deal with the time required for 6
Table 2: The TTCR of the case study company in Hong Kong and global average
Table 3: Time to comply for the case study company in Hong Kong and global average
Description
TTCR
Formula
Description
Number of hours
Corporate income tax (i.e. Profit tax) TTCR
16.54%
[A]
Corporate income tax (i.e. Profit Tax) TTCR
20
Mandatory contributions borne by the employers (i.e. Mandatory Provident Fund) TTCR
5.29%
[B]
Value-added tax
Not applicable in Hong Kong
Labour Taxes (i.e. Mandatory Provident Fund)
14.5
Total
34.5
Global average
234
Rates (an indirect tax levied on properties in Hong Kong) TTCR
0.11%
[C]
Hong Kong TTCR
21.94%
[D] = [A]+[B]+[C]
Global average
40.5%
obtaining a refund of excess input VAT incurred due to a large capital purchase, while 3) and 4) deal with an error in the calculation of tax liability which leads to an incorrect CIT return and consequently a payment of the underpaid CIT. The result of the four components is a score ranging from 0 to 100. The higher the score, the better the postfiling compliance process. If an economy does not have a VAT regime, it will not be scored on 1) and 2). If an economy has VAT but there is no mechanism to refund excessive VAT credit in place, the economy is assigned a score of 0 for 1) and 2). Hong Kong is not scored on 1) and 2). Concerning 3) and 4), it is estimated that the case study company can complete the CIT correction in less than 3 hours and the current case is unlikely to give rise to a tax audit. As a result, Hong Kong scores high and accounts for 98.9 in Post-Filing Index. The global average score was 60.9. All four indicators of each economy are converted into scores, and the final score is the simple average of the scores of the four indicators. The ranking of economies on the ease of paying taxes is determined by sorting their final scores. Hong Kong ranks No.2 in Paying Taxes 2020 with a final score of 99.7. Hong Kong’s outstanding performance in Paying Taxes 2020 is largely due to the January 2020
fact that Hong Kong upholds a simple tax system with only three principal direct taxes, i.e. profits tax , salaries tax, and property tax. Salaries tax is also handled by individual employees on their own, rather than an administrative burden for the business. Hong Kong with its simple tax regime and relatively low tax rates has maintained its top rankings in Paying Taxes for years, and provides efficiency and certainty for commercial undertakings from tax perspective.
Limitations of the study Like all academic studies, Paying Taxes has its limitations these include: • The case study company is not a real company and does not represent the real business data in an economy, and does not cover all aspects of an economy’s business environment. • It does not include any incentives or benefits apart from those related to the age or size of the case study company. For example, although many countries have different kinds of tax incentives for hightech/innovation, such incentives are not included in the report. • The TTCR does not take into account timing difference as the data measured are only for the second year of operation. A high TTCR does not necessarily mean
a hurdle to the business environment, as TTCR is usually closely related to government spending and welfare system in an economy.
The takeaway Despite the limitations of the study, Paying Taxes is still of great significance and serves as a good reference to governments in benchmarking the tax environments and promote tax reforms. It has witnessed substantial improvements in the ease of paying taxes over the past 15 years globally, especially in terms of the use of technology.
This article is contributed by Rex Chan, Paying Taxes Team Leader, PwC China 7
Economic substance law – the British Virgin Islands A look at the implications of the new economic substance laws on Hong Kong businesses
Economic substance laws were introduced in major offshore jurisdictions including the Bahamas, Bermuda, British Virgin Islands (BVI), Cayman Islands, Channel Islands (Guernsey and Jersey), Isle of Man, Marshall Islands, and became effective on 1 January 2019. The introduction of the new laws was in response to the various efforts made by the Organization for Economic Cooperation and Development to enhance global tax transparency, as well as the review by the Code of Conduct Group of the European Union (EU) into certain low or no corporate income tax jurisdictions. The underlying concept behind these laws, that economic substance should align with where profits are booked, and thus the tax outcome should follow, is not new. The laws also aim to level the playing field among the no or low tax jurisdictions and therefore the laws are substantially similar. The BVI’s Economic Substance (Companies and Limited Partnerships) Act, 2018 (the act) is of particular interest to Hong Kong corporate groups because it is common to find BVI companies within them. Therefore, the act has wide implications for Hong Kong businesses.
The framework A “relevant entity” (including BVI incorporated companies, foreign entities registered in the BVI and limited partnerships having legal personality) that engages in one or more of the nine “relevant activities” are required to comply with the act by maintaining an February 2020
appropriate level of economic substance in the jurisdiction commensurate with the entity’s business. The relevant activities are 1) banking, 2) distribution and service centres, 3) finance and leasing, 4) fund management, 5) headquarter business, 6) holding companies, 7) insurance, 8) intellectual property holding, and 9) shipping. The coverage of these relevant activities are intentionally wide. The economic substance requires that the relevant entity should be able to demonstrate that it is managed and directed by the board locally. This means a sufficient quorum of the board of directors should meet periodically in the BVI to manage the entity. The core income generating activities that correspond to the entity’s business should also be conducted locally by qualified employees stationed within a physical premise. Lastly, an appropriate level of expenditure would naturally be spent in the BVI as a result of the above local business substance. To provide the necessary implementation guidance, the Rules on Economic Substance in the Virgin Islands (the rules) were finalized on 9 October 2019. There are potentially three ways to respond to the act if a relevant entity falls within its scope: 1. Build economic substance locally. BVI entities could choose to build and maintain local substance if this is commercially practicable and justifiable. The key challenge in this regard is the limited resources
available in the BVI. The cost and effort required to acquire and then manage local resources (including the logistics of personnel travelling to the BVI) should not be underestimated; 2. Revise the corporate group’s operational and legal structure. Make the entities fall outside the scope of the act. There are some important exceptions and exclusions that are discussed below; and 3. Transfer business operations and assets out and liquidated or wind down the BVI entities. If the BVI entities are intermediate or direct holding companies, special attention should be paid to whether the local laws where the subsidiaries are located would deem such change as an indirect transfer of ownership which may trigger tax implications. Based on the rules, the act would still need to be complied with until the liquidation is officially completed. Re-domiciling the BVI entities would also withdraw the entities from the BVI regime. However, the Hong Kong Companies Ordinance (CO) currently does not provide for a re-domiciling regime. This is currently being proposed by a number of professional bodies in Hong Kong. Compliance with the act is assessed based on a 12-month period which can be different from the accounting period of the entities, and may be shortened on election. Reporting should be done within six months after the relevant financial period. For entities incorporated before 1 January 2019, the first reporting period 8
runs from 30 June 2019 (when a transition period expired) to 29 June 2020 (or an earlier date upon election). Therefore, the immediate reporting deadline will be 29 December 2020 if no such election is made. For entities incorporated on or after 1 January 2019, the first reporting period runs from the date of incorporation to 12 months thereafter, unless elected otherwise. Reporting should be done through the entities’ registered agents. The information collated including the entities’ tax residence status, turnover, number of employees, amount of expenditure, address, etc., together with supporting documentary evidence where relevant, will be reported to the authorities through the existing Beneficial Ownership Secured Search system. There are potentially severe penalties, which could be imposed as a result of noncompliance, including monetary penalties, exchange of information with the tax authorities where the beneficial owners are located, and – in extreme situations – striking off the entities.
Exceptions and exclusions There are some exceptions and exclusions that may result in the BVI entities operating fully outside the prescribed operations of the act. No relevant activities Although the coverage of “relevant activities” is wide, there are still some activities that are not covered. For example, investment funds and entities February 2020
holding immovable properties (outside the BVI) are not “relevant activities.” Also, if no actual business activities are conducted, or if no income is generated, the entities would not be considered as engaging in “relevant activities.” This is practically useful, for example, if an intellectual property holding company received no royalties or license fees for the relevant financial period it would fall out of scope of the act. Corporate groups using a BVI special purpose vehicle to hold legal title of the intellectual property for other legal and commercial reasons, and not to generate income from the exploitation of the intellectual property, could potentially maintain status quo. However, for an entity that had been charging royalties in the past and decided to stop charging royalties, the group’s wider transfer pricing and local tax implications should also be considered before such changes are undertaken. Pure equity holding company Holding companies are subject to a less stringent economic substance requirements where only an appropriate level of employees (or outsourced resources) and business premises are required. The reduced requirements apply to a “pure equity holding company” (PEHC) that is narrowly defined as an entity that only holds equity investment and receives dividends and capital gains only. A PEHC is not required to be managed and directed in the BVI. This would suggest that maintaining sufficient qualified director(s), maintaining sufficient quorum of each board meetings physically present in the
BVI, and making key decisions in the BVI are not necessary. Having said that, this narrow definition also likely means a very strict application of the law. For example, a holding company that provides financing to its subsidiary by way of an interest bearing loan is likely not a PEHC, and could potentially be subject to the economic substance requirements applicable to a financing and leasing company if it is regarded as carrying on a financing business. Interestingly, the rules clarified that for a PEHC that actively manages its equity participations, adequate and suitably qualified employees and appropriate premises should be maintained locally. This could mean that a PEHC that trades listed shares (as these are by definition equity investments) frequently may need to employ at least one investment manager who would manage the buying and selling of the shares from a local office. While outsourcing is always permissible, the practical aspects of this operating model should be considered. For completeness, it is important to note that by virtue of its share trading activities, this BVI entity may have already constituted a taxable presence or permanent establishment somewhere outside the BVI notwithstanding the enactment of the act, and thus the relevant (historical) tax implications should also need to be dealt with in tandem. Non-resident in the BVI BVI entities that are tax residents in another jurisdiction which is not “blacklisted” (i.e. not a jurisdiction included in the 9
EU’s list of non-cooperative jurisdictions for tax purposes) are out of scope, provided their income from relevant activities are subject to tax in a jurisdiction outside the BVI. The underlying rationale is that such entities should be properly taxed in such another jurisdiction. That said, the rules go on to explain that: “It is accepted that some jurisdictions charge tax by reference to a criterion other than residence. What matters is whether the tax authority in the jurisdiction in question has accepted that the entity (or its participators in the case of a transparent entity) is chargeable to tax (to the extent that the jurisdiction charges tax on income) in that jurisdiction by reference to the relevant local criteria.” The underlined explanation is of importance and relevance to Hong Kong, which only taxes Hong Kong sourced profits. As mentioned above, Hong Kong does not have a re-domiciling regime and so to be regarded as a tax resident in Hong Kong, the procedure would involve registering the BVI entity as carrying on business in Hong Kong (i.e. a place of business in Hong Kong), and exercising management and control from Hong Kong. To achieve this, the BVI entity would have to be registered as a non-Hong Kong company under Part 16 of the CO (and consequentially registered under the Hong Kong Business Registration Ordinance). The rationale behind is, perhaps, that once the BVI entity is registered in Hong Kong, it would be subject to profits tax under the Hong Kong Inland Revenue Ordinance. The BVI entity would have to produce evidence such as a February 2020
tax identification number, copies of profits tax return, notice of assessment, Business Registration Certificate, certificate of tax residence, etc. The fact that the BVI entity may have some non-taxable income (i.e. dividend income or offshore interest income) should not disqualify that entity from being regarded as a Hong Kong tax resident. While this interpretation would fall within the “relevant local criteria” basis of taxation for Hong Kong, this position has not been tested and may be subject to the views of the BVI authorities. Assuming this position can be sustained, registering the BVI entities as tax residents in Hong Kong may be a practical way out to Hong Kong corporate groups with BVI entities (that are not holding companies) as part of their corporate structure. However, before registering such BVI entities in Hong Kong, historical and go-forward Hong Kong profits tax implications (if any) should be considered. Particularly, late registration under both the Companies and Business Registration Ordinances, and late or under reporting of prior year profits tax would trigger potentially significant penalties.
groups should not only implement measures to ensure compliance with the act, but a holistic review of the group’s entire legal and operational structure should be conducted to develop a longerterm solution. It is also necessary to bear in mind potential changes in view of the changing global tax landscape, and the potential stricter interpretation and enforcement of the act in the medium term. Finally, as one may notice from the above, the act and the potential solution and compliance have wide and multidisciplinary implications from the aspects of legal, tax, finance, operations and compliance, etc. A detailed project plan, with support from different internal and external experts, is key to the successful implementation of the solution.
Going forward The act is part of the game plan in enhancing global tax transparency, which also fundamentally changes the legal and tax considerations in using offshore entities. Although the BVI entities have issued the rules to provide implementation clarifications to the act, a lot of uncertainties remain. Corporate
This article is co-authored by Eugene Yeung and Johnson Tee, Directors of KPMG’s Corporate Tax Advisory practice in Hong Kong. 10
Paying taxes in China A look at how China performs in the World Bank Group’s Paying Taxes report
This article follows one from January entitled Is Paying Taxes Easy? that introduced the World Bank’s methodology of computing and comparing the paying taxes indicators among 190 economies. In this article, we will look into how China performs in Paying Taxes.
China is taking actions to optimize its tax environment Improving the doing-business environment has been an important initiative in China, evidence for which can be found in the annual Government Work Report, various circulars, and news announcements issued by the central and local governments. For instance, the State Council released the “Regulations on Improving the Doing-business Environment” in October 2019, underscoring the protection of market players, market environment, government services, etc. needed to create a stable, fair, transparent and predictable doing-business environment in China. As one of the key elements in improving the doing-business environment, optimizing the tax environment is undoubtedly among the top priorities of the nation. Recent efforts are dedicated to three areas, tax reduction and fee cut, upgrading tax legislation from tax regulations, and improving taxpayer services. China’s achievements and plans in these areas as well as other fiscal and tax reforms are reflected in the Paying Taxes indicators (see table on p.40).
Total tax and contribution rate: a decreasing trend Total tax and contribution rate (TTCR) March 2020
measures the amount of taxes and mandatory contributions borne by a typical company in the World Bank Group’s Paying Taxes report. The lower the TTCR, the lesser the tax burden. For China, a developing economy with a population of 1.4 billion, managing its TTCR is a challenging task. It involves not only multiple government organizations (i.e. tax and social securities authorities, at both the central and local levels) but also a careful balance between simplification of tax regimes and the impact on government revenues and expenditures. For the Paying Taxes report, this is more complex due to the World Bank Group’s expansion of its measurements to include two cities (Beijing and Shanghai). As the different social security contribution rates and different treatments of certain taxes between Beijing and Shanghai add to the complications. Yet, even while facing these challenges, China has come a long way in reducing its TTCR. When comparing Paying Taxes 2006 (which measures 2004) against Paying Taxes 2020 (which measures 2018), there has been a substantial decrease in the TTCR from 82.8 percent to 59.2 percent. Undeniably, the series of tax reforms launched have greatly relieved tax burdens for corporate taxpayers. These include: reducing the statutory corporate income tax (CIT) rate from 33 percent to 25 percent in the 2008 reform; introducing the lower CIT rate for small and thin-profit enterprises from 2018 and further relaxing the threshold in 2019; eliminating double taxation in the turnover tax regime by expanding the scope of input value-added tax (VAT) recovery to capital purchases effective from 2009; and combining business tax and VAT through the “B2V reform” starting in 2012. These reforms are having a significant
impact. In 2018 alone, China cut taxes in the total amount of RMB 1.3 trillion. In 2019, over RMB 2.3 trillion in taxes and fees were further reduced out of the total tax revenue RMB 15.8 trillion. The amount and the speed in implementing tax reduction measures across China is impressive, and has been recognized in the TTCR in recent years’ Paying Taxes reports. But obviously tax reductions alone cannot bring down China’s TTCR. A major component of the TTCR in China is employers’ contributions to social security and the Housing Provident Fund (around 46.2 percent of the TTCR in Paying Taxes 2020). The government has committed to reduce this part of the labour costs for enterprises of all sizes, especially small- and medium-sized. From 2019, the employer’s pension contribution rate has been standardized at 16 percent of employees’ annual salary, lower than that previously collected by most cities of around 20 percent.
Number of payments The number of payments is a relatively straight-forward indicator. It reflects the total number of payments made by the case study company in one year. According to the Paying Taxes methodology, joint payments can be counted as one time where two or more taxes and mandatory contributions are filed and paid in the same tax filing form. Electronic filing is also counted as one time in a year for each type of tax. This counting methodology is designed to encourage economies to simplify and digitize tax filings. In Paying Taxes 2006, with a tax system involving multiple types of direct and indirect taxes, the number of payments for China was 37. With the gradual adoption of online 11
Paying Taxes indicators Performance in Paying Taxes 2020 (which measures 2018)
China Total tax and contribution rate
59.2%
Number of payments
7 payments
Time to comply
138 hours
Post-Filing Index (0-100), comprised of four components
50
(A) Time to apply for a value-added tax (VAT) refund
Insufficient data
(B) Time to obtain the VAT refund
Insufficient data
(C) Time to comply with a corporate income tax (CIT) correction after the annual CIT filing
1 hour
(D) Time to complete a CIT correction, including dealing with any potential reviews such as tax audit (in weeks)
Unlikely to trigger audit
filings and electronic payment methods, China managed to reduce the number of payments to nine since Paying Taxes 2010. This was reduced in Paying Taxes 2019 by one after the completion of the B2V reform in 2016 that abolished business tax. In Paying Taxes 2020, the country-wide successful implementation of online filings has helped China achieve a record low number of seven payments, and the country ranked at 16th among 190 economies for this sub-indicator.
Time to comply: digitalization has made a big difference Unlike the number of tax payments, time to comply is perhaps more difficult and subjective to measure. It measures the time for the case study company taken to prepare, file and pay three type of taxes, namely CIT, VAT and labour taxes. In Paying Taxes 2020, China’s time to comply was assessed at 138 hours – 94 hours of preparation, 37 hours of filing and seven hours of making payments. China’s compliance hours has improved drastically through the years. From Paying March 2020
Taxes 2006 to Paying Taxes 2020, the total hours decreased from 832 to 138, though reducing compliance burden has never been easy. The inherent complexity in the design of the system requires more controls to ensure its effectiveness, for example, the use of VAT paper invoices to curb VAT fraud, corporates’ withholding obligations for individual income tax, social security contributions and the Housing Provident Fund due to the difficulty in collecting them direct from individuals, etc. The wide geographic spread of corporate and individual taxpayers makes it harder to balance the effectiveness of tax enforcement and the burden of compliance. To the Chinese tax authorities, this sub-indicator is perhaps a subtle measurement of their efficiency. Digitalization, and tax officials’ cultural shift from tax enforcement to taxpayer service, are vital in slashing the compliance hours. For tax collection and administration via digital means, Chinese tax authorities have done a lot: the Golden Tax III system was launched to connect VAT invoice management and VAT filings; artificial
intelligence is increasingly deployed by tax bureaus, including handling tax queries, online tax trainings, etc. Furthermore, automatic data conversion from financial software to the tax filing system has also been introduced to create a “one-click filing” system for taxpayers. Today, almost all tax matters could be handled via online channels, and even on mobile apps. Tax authorities also promote new tax laws and regulations on popular social media, such as WeChat and Weibo, to connect with the younger generations. The use of digital means in disrupting the traditional tax administration has led to a big decrease in China’s tax compliance hours. On taxpayer service, mindset change also happened from within. Actions including eliminating tax related approvals, encouraging self-assessment in lieu of tax audits, upgrading taxpayer consultation hotlines, and the most recent organizational reform to integrate the state tax authorities and local tax authorities into one, all have helped to promote an image of easy tax-paying. 12
Source: Paying Taxes
Post-Filing Index: input VAT refund is the hope? The Post-Filing Index is a supplement to the aforementioned three indicators. Introduced in Paying Taxes 2017, the indicator measures the efficiency of processes that take place after a tax return has been filed when there could be additional interactions between taxpayers and tax authorities to agree on the final tax liabilities. The index seems to encourage economies to improve their postfiling administration processes. China scored 50 out of 100 in the Post-Filing Index in Paying Taxes 2020, which measured both CIT correction and VAT post-filing refund processes. On the CIT correction indicator – measuring the time required to complete a CIT correction post-filing and the likelihood of triggering a tax audit should the case study company perform a CIT correction – China scored the full 50 marks. With respect to VAT postfiling, Paying Taxes measures two aspects: (1) the availability for the case study company to claim a refund for excessive input VAT credit (VAT refund); and (2) time March 2020
Number of payments
Time to comply (hours)
Trend of Paying Taxes indicators in China
Calendar year
taken to apply for and obtain the refund. China scored zero. China used to only allow carry-forward of excessive input VAT credit to the next filing period, and a refund mechanism was not available until 2018 when a pilot refund policy was introduced for 19 sectors. This was rolled out to all industries in early 2019. As this reform came into effect only in August 2018, it was not possible for taxpayers to get a robust understanding of how long the VAT refund processes would take, and as such China scored zero in Paying Taxes 2020.
Beyond Paying Taxes 2020 The diagram above illustrates the trend of Paying Taxes in China from 2004 to 2018 (calendar year). China’s overall score in Paying Taxes 2020 was 70.1, which results in its ranking of 105. The government’s commitment to reform its tax system is witnessed in the steady improvement of its overall ranking since Paying Taxes 2008 (ranked 168). With the expansion of VAT refund
policy in 2019 to all industries, we may be expecting a higher score in the Post-Filing Index for Paying Taxes 2021 and beyond. As a matter of fact, according to public sources, in 2019, RMB 9.44 billion of excessive input VAT credit has been refunded to 852 Beijingbased enterprises and RMB 10.7 billion to 1,737 Shanghai-based enterprises. Starting from Paying Taxes 2021, the World Bank Group has made some changes to the Paying Taxes methodology, which will result in a significant impact on the case study company parameter. More importantly, it may also change the dynamics of the overall rankings, especially for China.
This article is contributed by Rex Chan, Paying Taxes Team Leader at PwC China 13
IRD issues guidance on cryptocurrency taxation An overview of the Inland Revenue Department’s guidance on digital assets On 27 March, the Inland Revenue Department (IRD) issued the revised Departmental Interpretation and Practice Notes (DIPN) No. 39 Profits Tax – Digital Economy, Electronic Commerce and Digital Assets. The focus of this article is digital assets. Hong Kong has long been a popular choice for doing business for its robust regulatory framework, abundance of capital and wealth of human capital. From a business perspective, its position as a global financial hub also grants it unrivalled advantages for fundraising and ammunition to incubate innovation. Hong Kong’s low, simple and competitive tax regime complements these advantages, fostering the free flow of capital in every sense. Within the market, it is encouraging to see that many substantial blockchain/ digital asset projects have taken root in Hong Kong. While the absence of an indirect tax regime such as value-added tax or goods and services tax makes it easier for these companies to operate service platforms and exchanges without having to worry about transactional tax burden, there remains uncertainties regarding how corporate income tax rules (e.g. profits tax in Hong Kong) treat these business activities. The broad guidance set out by the non-binding DIPN is welcomed as a step on the regulatory front to bolster Hong Kong’s position in this industry. However, we also discuss some areas where more needs to be done in order to ensure that Hong Kong’s existing tax laws do not tax digital assets unfavourably. Turning to some of the key areas of clarity provided by the DIPN. Categorization of digital assets for Hong Kong tax purposes According to the IRD, the profits tax treatment of digital tokens would depend on their nature and use. To this extent, the IRD provides three categories of digital assets and sets out how these would be classified for tax purposes. a. Payment tokens are used as a means of payment for goods or services and encompass cryptocurrencies (e.g. bitcoin). They do not provide the holder with any rights or access to goods or services. Such tokens are not legal April 2020
tender in Hong Kong but are regarded as virtual commodities. b. Security tokens provide the holder with particular interests and rights in a business. They represent ownership interests in the business, a debt due by the business or entitlement to a share of profits in the business. Where digital tokens constitute “securities” as defined in the Securities and Futures Ordinance, then the IRD confirms that the existing provisions in the Inland Revenue Ordinance that relate to securities and collective investment schemes would also be applied to the taxation of such digital tokens where relevant. c. Utility tokens provide the holder with access to particular goods or services which are typically provided using a blockchain platform. The token issuer would normally commit to accepting the tokens as payment for the particular goods or services. Initial coin offerings While initial coin offerings (ICOs) have all but vanished after reaching their peak in 2018, in Hong Kong new companies normally do not file tax returns until 18 months after commencement of business (or earlier if they derive taxable profits in their first accounting period), and hence it is about time when the IRD starts reviewing the tax returns filed by companies having done ICOs. The guidance clearly states that the IRD will review the white paper or any other underlying documents of an ICO and examine what rights and benefits are attached to the digital tokens. From the perspective of the issuer, the tax treatment of the proceeds from an ICO generally follows from the attributes of the tokens. It is the nature of the rights and obligations of the tokens, not the form in which the tokens are issued, that determine the tax treatment. For example: a. Proceeds from the offering of securities tokens that give token holders shareholders’ rights would be capital in nature (and accordingly should not be taxable). b. Proceeds from the offering of utility tokens that give token holders a right to future benefits would be viewed as a
prepayment for future goods or services and would be taxable if sourced in Hong Kong. The timing of revenue recognition would depend on the details of the issuer’s performance obligations, determined in line with generally accepted accounting principles. Digital assets held for investment If digital assets are bought (e.g. through an ICO or exchange platform) for long-term investment purposes, any profits from disposal would be capital in nature and not be chargeable to profits tax. In determining whether the digital assets are capital assets or trading stock, the usual approach would be adopted – i.e. after considering the facts and circumstances, applying wellestablished tax principles like the “badges of trade.” Cryptocurrency business The DIPN sets out the common business activities involving cryptocurrency to include the trading of cryptocurrency, exchange of cryptocurrency, and mining (the validation of transactions on the blockchain in exchange for newly-issued cryptocurrency). The extent to which these activities amount to the carrying on of a trade or business is a matter of fact and degree to be determined upon a consideration of all the circumstances. Factors such as the degree and frequency of the activity, the level of system or organization (i.e. whether the activity is undertaken in a business-like manner) and whether the activity is done for the purpose of making a profit are relevant considerations. Hong Kong-sourced profits from a cryptocurrency business carried on in Hong Kong are chargeable to profits tax. The broad guiding principle (i.e. what were the person’s operations that produced the relevant profits and where those operations took place) will be applied to determine the source of the profits. Similar comments were made in the 2018 annual meeting between the IRD and the Hong Kong Institute of CPAs, but unfortunately no further guidance is provided beyond these general comments in the DIPN. New cryptocurrencies received through certain events such as airdrops 14
(free distribution of cryptocurrency for publicity purposes) and blockchain forks (divergence based on changing protocols) in the course of a cryptocurrency business are to be regarded as business receipts of the business and assessed accordingly. Cryptocurrency used for business transactions Transactions involving cryptocurrencies should be accrued based on the prevailing market value as of the date of transaction. Cryptocurrency received as employment income The same salaries tax treatment would apply to remuneration in cryptocurrency received by employees, and the amount to be reported should be the market value of the cryptocurrency at the time of accrual. Readers are reminded that both employers and employees have reporting obligations.
Areas requiring further guidance While the DIPN has covered many common issues encountered by cryptocurrency industry players and the IRD’s views are largely in line with our views, there are some issues where uncertainty remains. Furthermore, there are a number of areas of Hong Kong tax law where special concessions, or specific tax treatments, are available to certain kinds of businesses, but only when those businesses are entering into transactions in securities. In many cases, these concessions have been provided to ensure that Hong Kong’s financial services sector remains competitive from a tax perspective. However, even though many digital assets are marketable and can be traded on exchanges, they often do not meet the definition of a security. If the same concessions are not available to businesses performing fundamentally similar activities, but trading in digital assets, then Hong Kong risks seeing these businesses move to other jurisdictions. We highlight a number of areas where we feel that further guidance, or if necessary legislative change, is needed to ensure that businesses trading digital assets are taxed in ways that are consistent with currently established practice relating to the trading of more traditional financial assets. Treatment of unrealized gains/losses The DIPN has not touched on the April 2020
treatment of fair value gains and losses that may arise from the yearend revaluation of the digital assets used for the purposes of carrying on a cryptocurrency business. Our view is that the treatment should depend on the nature of the digital assets (whether capital or revenue), and to the extent that they are revenue in nature. it would appear that the principles in the Court of Final Appeal Nice Cheer Investment Limited v. Commissioner of Inland Revenue case – which established that unrealized gains from the increase in value of trading stock are not chargeable to tax at the time they are accounted for, but should instead be taxed at the time of realization – should generally be followed unless the provisions under the Inland Revenue (Amendment) (No. 2) Ordinance 2019 apply. The provision allows taxpayers to elect to be taxed on a fair value basis in respect of financial instruments accounted for in accordance with Hong Kong Financial Reporting Standard (HKFRS) 9 Financial Instruments (or International Financial Reporting Standard (IFRS) 9). However, since not all digital assets are accounted for in accordance with HKFRS/IFRS 9, the IRD may consider providing a concession or making legislative changes to allow for such an election in the case of digital assets that are trading stock. Availability of profits tax exemption for qualifying investment funds The Unified Fund Exemption regime, enacted in 2019, provides that all privately offered onshore and offshore investment funds operating in Hong Kong, regardless of their structure, size or the purpose that they serve, can enjoy a profits tax exemption for their transactions in qualifying assets subject to meeting certain conditions. Qualifying assets broadly cover securities and other types of financial products. As digital assets that are not securities would not be qualifying assets, crypto funds investing in such digital assets will not be able to enjoy the tax exemption. The government may wish to consider whether from a policy perspective the regime can be extended to allow crypto investment funds to benefit from it, especially given that the Securities and Futures Commission recently introduced a new regulatory regime covering crypto fund managers.
Potential adverse tax implications associated with crypto borrowing and lending transactions Similar to traditional financial institutions which may engage in regular securities borrowing and lending transactions, players in the cryptocurrency industry may engage in the borrowing and lending of digital assets, or commonly referred to as “crypto borrowing and lending.” In a separate DIPN, the IRD has indicated that it will look at the legal form rather than the underlying economic substance or accounting treatment as a starting point to determine the nature of a given financial instrument. Given that a crypto lending transaction may constitute a change in legal title, there is a risk that it would be regarded as a disposal by the lender and acquisition by the borrower of the coin, in which case the realized gain/ loss could be included as the lender’s taxable profits. While the Inland Revenue Ordinance contains specific provisions to provide relief for securities borrowing and lending transactions, such relief may not be applicable to crypto borrowing and lending transactions that do not fall within the ambit of the provisions. The government may wish to consider extending the relief to cover these transactions. As blockchain and the associated business models are still relatively new, there will certainly be more tax questions arising from different scenarios – for instance, how should the source of profits be determined in cryptocurrency mining through proof of work vs. proof of stake, or more broadly in the context of smart contracts that are executed autonomously on a blockchain? How can permanent establishment risks be managed? How can one determine the value of digital assets that are not widely traded for tax purposes? Would the transfer of certain types of digital assets give rise to stamp duty? What actions are needed from a Common This article is Reporting Standard contributed by perspective? Gwenda Ho, Tax All these and Partner, many other issues Peter Brewin, will need to be Transfer Pricing addressed by Partner, and companies operating Tommy Hui, in this sector, as the Senior Tax industry evolves. Manager at PwC 15
Reviewing the OECD’s COVID-19 analysis A look at how the OECD’s new guidance can help taxpayers affected by COVID-19 The Organization for Economic Cooperation and Development (OECD) issued an analysis on 3 April examining tax treaties and the impact of the COVID-19 crisis. OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis contains a number of potentially significant tax concerns may arise as a result of key staff being forced to work in a location other than their normal place of work. These include accidentally causing a company to be resident in a location other than intended, accidentally creating a permanent establishment or other taxable presence in a new jurisdiction, and changes to the tax residence status of the individual concerned. The OECD analysis is helpful in this regard, setting out the view that COVID-19 measures are generally exceptional and should not normally have an impact on a company or an individual’s tax status under tax treaties in a particular jurisdiction. We note however, that construction projects appear to be an exception where delays as a result of the virus may result in a permanent establishment being created. The OECD’s guidance will be helpful for many taxpayers who are concerned about the impact staff dislocation may have on their tax position. However, it is worth noting that it is only guidance, and is not binding, especially on the many jurisdictions in this region that are not OECD members. Further, the paper primarily deals with the position under OECD-model treaties rather than liabilities that might arise under domestic law. We note that a number of jurisdictions, such as the United Kingdom and Australia, have also issued their own guidance setting out the domestic law position and trust that other jurisdictions will take a similar approach, although taxpayers will need to monitor this on a case-by-case basis. Finally it is worth noting that, while the OECD generally encourages a position of maintaining the status quo, taxpayers who were already close to the minimum requirements for maintaining their requisite presence in multiple jurisdictions for residence or substance purposes may find April 2020
their positions have become more difficult to manage.
Detailed comments Permanent establishments The OECD considers it unlikely that employees working from home in a different jurisdiction from that in which they habitually work would create a permanent establishment risk in the new location. As this situation is temporary and exceptional, it would not generally have the requisite degree of permanency to create a fixed place of business. In addition, carrying on intermittent business activities at home as a result of government directives does not put an employee’s home at the disposal of the enterprise. In general, for a home office to create a permanent establishment, an enterprise has to require that employee to use their home and for them to do so on a continuous basis. Where a separate place of employment is made available to the employee, the exceptional use of a home office is unlikely to be a fixed place of business. Similarly, the functions exercised from home, even if they involve significant roles in the conclusion of contracts, are unlikely to be regarded as habitual, particularly when an employee is only working from home as a result of force majeure or government directives. However, the situation may be different where an individual was already habitually concluding contracts in their home country before the outbreak. Finally, the OECD notes that any temporary break in construction projects as a result of the pandemic should be included in the duration of the project for the purposes of calculating whether there is a permanent establishment. This may mean that some projects originally slated to fall within the relevant de minimis limit in the treaty may now run over the limit and result in a taxable presence. Developers should review their situations in this regard.
Corporate residence Similarly to the position on permanent establishments, the OECD is of the view that the temporary relocation of board members to a different location as a result of COVID-19 should not have an impact on a company’s residence. It is worth noting on practical terms, however, that the strength of this analysis depends on which version of the treaty is in use. The most recent 2017 version of the model convention settles cases of dual residency by mutual agreement between the authorities. The OECD commentary (Article 4, paragraph 24.1) gives a range of factors to be considered, including where board meetings are usually held, where the chief executive officer and other senior officials usually undertake their duties, where the company’s headquarters are and where day-to-day management is usually carried on. The OECD is of the view that in most cases this should lead to no change of conclusion if senior executives are temporarily located abroad. The pre-2017 model convention was more mechanical and requires jurisdictions to look at the company’s place of effective management. All relevant factors must be considered. The OECD notes that some states interpreted the place of effective management as being ordinarily the place where the senior person or group of persons make management decisions. This implies some may have a different interpretation. So while the OECD’s stance is clear, it appears there is still scope for some jurisdictions to take a different view. Cross-border workers Where an employee lives in one jurisdiction but works in another, any employmentrelated income remains taxable in the first instance in the location where they used to work. This applies equally in the case of government subsidies during the COVID-19 crisis. According to the OECD’s analysis, such subsidies most closely resemble termination payments which the OECD commentary attributes to the place where employment took place. 16
Individual residence The OECD considers it unlikely that an individual’s residence would be affected by the COVID-19 situation. They note that this is only the case where there is a treaty in place – absent a treaty, a simple “dayspresent” test may well result in residency and it would be a matter for the host country to determine what relief to grant. The U.K., Ireland and Australia have already done this. They envisage two basic scenarios. One is a person stranded overseas having travelled on holiday or a short business trip. Assuming that person meets the domestic residence requirements of both jurisdictions, the normal tiebreaker in the first instance would be where the individual had a permanent home, and that would almost always be their home country. The second scenario is more complex, where someone who normally lives abroad and has residence there has returned to their previous jurisdiction of residence. In this case, they may have ties to the previous jurisdiction which make the outcome of the tiebreakers less clear or potentially tip the balance from one place to another. However, ultimately the relevant authorities would need to consider the habitual abode of the individual and the OECD’s view is that this should be considered over a sufficiently long period of time. They consider it would be inappropriate to base it on an exceptional circumstance such as COVID-19.
Observations Overall, the OECD’s analysis is to be welcomed as a pragmatic approach designed to prevent taxpayers facing unforeseen tax difficulties as a result of the crisis. For the most part, it recommends jurisdictions concluding that taxpayers retain the same tax profile as they had before the outbreak. Nonetheless, it does note some limitations to this approach: 1. It is only applicable where there is a double tax treaty in place; absent this, domestic law provisions may be much more stringent or less flexible than the standard treaty provisions. Hong Kong, in April 2020
particular, does not have treaties with a number of significant locations, meaning that the existing low thresholds for carrying on business and the 60 day test for salaries tax may still apply. 2. Many treaties have variations from the OECD model convention. 3. Borderline cases may be placed in a more difficult position – while it is unlikely that a large company is going to face difficulties because its chief executive got stuck overseas on a business trip, individuals or companies with a less clear residential status still risk the effects of the virus tipping the balance. While the OECD discourages this, it will ultimately be down to the interpretation of the tax authorities concerned. 4. On a wider basis, the attitude of individual authorities is clearly going to be critical to how businesses are impacted. The OECD refers to several authorities which have already issued guidance on these matters under their domestic laws and it is hoped others will follow suit. 5. Not all taxes are covered by treaties, so state and provisional taxes or social security contributions may still require separate analysis. 6. Finally, it appears that there may be a genuine impact on the taxability of construction projects as a result of the disruption of the virus. Although not expressly mentioned by the analysis, the move to restrict the extent to which a permanent establishment may arise as a result of COVID-19 measures should also assist employees who are currently working outside their usual country of residence as it would generally give them 183 days’ grace before their employment income became taxable overseas provided the employee continues to work solely for the benefit of an overseas employer and the cost of employment is borne overseas. On the other hand, the OECD’s guidance is premised on short, accidental presence. It does not cover what happens if the current situation were to extend for more than half a year, and parts of the analysis may be
susceptible to challenge where the new arrangements are strictly speaking a matter of choice rather than enforced by law. Its comments on cross-border workers are unlikely to be of practical help to anyone who normally works in Mainland China but is resident in Hong Kong and is currently forced to work from Hong Kong. On a practical level, both sides are likely to regard themselves as having the right to tax the income and it is unlikely in view of this that a tax credit will be available for the double tax paid. While we hope the relevant authorities can come to a pragmatic view in light of the special circumstances, concerned individuals should consult their tax advisors. While the guidance should provide a degree of reassurance for taxpayers during the disruption, it is important that taxpayers and their advisors work together to understand what their exposures might be, which are likely covered by treaties and what the approach of the relevant jurisdictions concerned will be. We would encourage the Inland Revenue Department to follow the lead of overseas authorities in issuing their own guidance on these issues confirming that Hong Kong would not seek to impose a tax charge, either under domestic law or a tax treaty, if a person has a taxable presence in Hong Kong only as a result of extraordinary measures resulting from COVID-19.
This article is contributed by KPMG China’s Ivor Morris, Tax Partner, Corporate Tax Advisory, Hong Kong, and Murray Sarelius, National Head of People Services 17
Massive U.S. tax relief act to combat economic fallout from COVID-19 A look at the new tax relief measures to help individuals affected by COVID-19 In view of the coronavirus (COVID-19) pandemic, a massive United States spending bill was signed into law on 27 March – the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The act is primarily aimed at providing immediate liquidity to businesses and individuals. A brief summary of the corporate (and individual, where applicable) tax provisions is as follows.
Delay filing of and payment on federal income tax returns due 15 April • Previous law: Taxpayers are generally required to file their 2019 federal income tax returns and pay the required taxes on or before 15 April. • Change: The Internal Revenue Service (IRS) grants filing and payment relief for taxpayers who are affected by the pandemic (affected taxpayers). For an affected taxpayer, the due date for making 2019 federal income tax payments, 2020 first quarter federal estimated income tax payments (including tax payments on selfemployment income), and filing federal income tax returns due on 15 April is automatically postponed to 15 July. The start date for calculating interest and penalties for late filing or late payment and the due date for applying for further extension are accordingly postponed.
Modification of net operating losses rules • Previous law: For net operating losses (NOL) arising in a taxable year after 31 December 2017, a prior law had generally: (1) eliminated the two-year NOL carryback period and allowed the NOL carryforward period to be indefinite; and (2) limited the NOL deduction to 80 percent of the taxable income for the taxable year. April 2020
• Change: The act allows for NOLs arising in a taxable year beginning after 31 December 2017 and before 1 January 2021 to be carried back to each of the five taxable years preceding the taxable year in which such loss arose, i.e. for calendar year taxpayers, this will be 2018, 2019, and 2020. And, the 80 percent-limitation is repealed for taxable years beginning before 1 January 2021. This would mean potential refunds of taxes paid in the relevant prior years at a higher tax rate.
Accelerating refunds for prior-year alternative minimum tax credits • Previous law: A prior law had repealed the corporate alternative minimum tax (AMT) but enabled corporations to recover previously paid AMT against the regular tax liability (or, if the AMT paid is in excess of the regular tax liability, 50 percent of the excess is a refundable credit) after 2017 and before 2022. • Change: Increasing the cash refund attributable to the AMT refundable credit amount (the excess of the credit over the regular liability) from 50 percent to 100 percent for 2019.
Enhanced business interest expense deductibility • Previous law: Certain taxpayers are subject to a limitation of business interest deduction equal to the amount of business interest income plus a 30 percent-threshold of its adjusted taxable income (ATI). • Change: The act increases the 30 percent-threshold on ATI to 50 percent for taxable years beginning in 2019 and 2020. Taxpayers are permitted to elect not to use the increased threshold. Also, taxpayers can elect to use their 2019 ATI as ATI for 2020. This new rule may potentially increase the amounts of NOLs generated in these taxable years
and benefit from the special five-year NOL carryback provision to obtain refunds of taxes paid in the relevant prior years at a higher tax rate. Aside from the above, the act includes other tax provisions that could be of interest to taxpayers, e.g. enhanced charitable contribution deductibility for corporations and individuals making qualified cash contributions, 100-percentbonus-depreciation for certain qualified improvement properties placed in service after 31 December 2017, a new employee retention credits for employers who are compelled to close their business due to the pandemic but will continue to pay their employees, recovery rebates in the form of direct cash payments for U.S. individuals (subject to phase-outs at certain income levels), receipt of “coronavirus distributions” from retirement plans without surcharge, etc.
Important note The full text of act is 880 pages in length. It is therefore important to note that the above is a highly simplified summary of some fairly complex provisions and taxpayers are strongly advised to consult their qualified U.S. tax advisors as to how these (and other) provisions could impact them before any action is taken with respect to any provision in the act. Note: This article was published on Hong Kong General Chamber of Commerce’s Coronavirus Business Help Corner on 31 March.
This article is contributed by Patrick Yip, Vice Chair, and Jennifer Shih, Tax Director of Deloitte China 18
Revised DIPN 39 raises controversies over an apparently inconsistent application of the source principles A look at the revised DIPN on the digital economy issued by the Inland Revenue Department The digital economy is rapidly changing ways of doing business. For tax authorities worldwide, this is creating challenges to implementing or modifying existing tax rules to deal with digital businesses, where physical nexus or tangible presence such as headcount or assets are minimal. It is therefore welcoming that the Hong Kong Inland Revenue Department (IRD) has revised its Departmental Interpretation and Practice Note (DIPN) 39 on the digital economy, first issued in 2001. The revised version, Profits Tax – Digital Economy, Electronic Commerce and Digital Assets, published in March, provides more guidance on its view on taxation of digital businesses. In a change from its previous position, the IRD indicates that a non-Hong Kong resident enterprise that only maintains a server in Hong Kong, without the involvement of human activities in Hong Kong, is now exposed to tax in Hong Kong. Revised DIPN 39 also extends the scope of the old DIPN 39 to cover the tax treatment of digital assets, including the tax position of an issuer in an initial coin offering, and what constitutes a permanent establishment (PE) in the context of e-commerce (e.g. the potential application of the anti-fragmentation rule, anti-abuse rule for the specific activities exemption from constituting a PE, and the dependent agent PE). Revised DIPN 39 also notes that the IRD’s position may change as a result of the conclusion of the current international discussion regarding changing the rules for taxing the digital economy under the Organization for Economic Cooperation and Development’s (OECD) Base Erosion May 2020
and Profit Shifting 2.0 initiatives, with consensus expected to be reached by the end of 2020. It is therefore worth noting that the IRD’s position is based purely on how the IRD considers the current provisions of the Inland Revenue Ordinance (IRO) would apply to the issues covered by the revised DIPN.
would not be regarded as carrying on a business in Hong Kong and, therefore, would previously not be exposed to tax in Hong Kong. However, under the current definition of PE, Revised DIPN 39 indicates that the IRD now follows the OECD’s interpretation that the mere presence of a server in Hong Kong can constitute a PE in Hong Kong.
Recent change in the definition of PE in the IRO
Only if a server “at the disposal” of an enterprise is “an essential and significant part” of the business would there be a PE
The IRO’s definition of PE changed in 2018 to mean “a fixed place of business in Hong Kong through which the business of [a non-Hong Kong resident enterprise] is wholly or partly carried on…” This was from “a branch, management or other place of business... [in Hong Kong].” This current definition is modelled on how the term is defined under the Model Tax Convention on Income and on Capital 2017 (MTC) for tax treaties of the OECD.
IRD’s change of its position as a result of the change in the definition of PE Under the previous definition of PE, the IRD considered that the words “branch, management or other place of business” implied a physical presence of a “place” and personnel. Previously therefore, the IRD did not consider the presence of a mere server in Hong Kong, without the involvement of human activities in Hong Kong, of a non-Hong Kong resident enterprise would constitute a PE in Hong Kong. This would generally mean that such an enterprise
It should be noted that not all servers maintained in Hong Kong by a non-Hong Kong resident enterprise would expose the enterprise to tax in Hong Kong. That is, not all servers create a PE in Hong Kong. Following the OECD’s position in its commentary on the MTC, the IRD states that (i) it is only where a server is “at the disposal” of an enterprise, and (ii) “an essential and significant part” of the business of the enterprise is conducted through the server that the PE exposure exists. These two conditions are discussed below. (i) “At the disposal” Regardless of whether a server is owned or leased by an enterprise, the revised DIPN indicates that if the enterprise can have effective control over the use of, and access to, the server, i.e. it can operate the server on its own, the place where such a server is located can constitute a PE of the enterprise. However, a website of a non-Hong Kong resident enterprise which is hosted on the Hong Kong server of a 19
third-party Internet service provider may not constitute a PE. This is because, under such a hosting arrangement, the enterprise would typically not have effective control over the use of, and access to, the server. (ii) “Core operations” Revised DIPN 39 indicates the core operations of an enterprise are those that “form an essential and significant part of the business,” beyond preparatory or auxiliary activities. What constitutes “core operations” for a particular enterprise however has to be determined on a case-by-case basis considering the fact and circumstances. While the revised DIPN also tries to be helpful by providing a list of “relevant” factors in considering the source rule, the list is not comprehensive for sophisticated digital businesses which have limited physical operations in Hong Kong. Regarding e-commerce, revised DIPN 39 nevertheless states that an at-the-disposal “intelligent server” in Hong Kong of a non-Hong Kong resident enterprise, that is a server capable of concluding contracts, processing payments or delivering digital goods, even without the involvement of human activities in Hong Kong, would constitute a PE of the enterprise in Hong Kong. This is because the Hong Kong server represents “an essential and significant part of the business of the enterprise.” The DIPN also gives examples of activities regarded as “preparatory or auxiliary in nature” including advertising, displaying a catalogue of products and providing information to potential customers. May 2020
server cannot function by itself and human An apparently inconsistent application of the source principles functions remain important in the carrying on of the e-commerce as a whole.”
Profits of a Hong Kong resident enterprise that performs all the core operations in Hong Kong (except a server outside Hong Kong) are fully chargeable to tax in Hong Kong Similar to the position taken by the IRD in the original version, the revised DIPN states that profits of a Hong Kong resident enterprise derived from its performance of all the core operations in Hong Kong of an e-commerce business would be fully chargeable to tax in Hong Kong under section 14 of the IRO. The IRD has stated this would be the case even if such an enterprise operates an intelligent server that is at its disposal outside Hong Kong. A literal reading of the DIPN would mean that notwithstanding that the functions performed by such an intelligent server outside Hong Kong can, in a sense, also be regarded as forming an essential and significant part of the business of the enterprise (see the above discussion), the IRD may disregard the server when considering the source of the profits of the Hong Kong resident enterprise if the other core operations performed by the enterprise in Hong Kong are more relevant and are the direct “profit-producing transactions” (the authoritative ING Baring Securities case on the source principles quoted in Revised DIPN 39 refers). This position is further reinforced by the statement that “[i]rrespective of the e-commerce model adopted, it is usually the case that tasks undertaken through a server are performed according to predesigned application software since the
A non-Hong Kong resident enterprise that performs all the core operations outside Hong Kong (except a server PE in Hong Kong) – should none of its profits then be chargeable to tax in Hong Kong? As far as the source of the profits under section 14 of the IRO is concerned, the position of a non-Hong Kong resident enterprise that performs all the core operations outside Hong Kong (except the location of a server PE in Hong Kong) may be regarded as the reverse position of the previous example. As such, given the IRD’s view that the profits of the above Hong Kong resident enterprise would be regarded to be fully chargeable to tax in Hong Kong (thereby effectively disregarding the location of the server as being relevant to determining the source of the profits), one may expect that none of the profits of a non-Hong Kong resident enterprise would then be chargeable to tax in Hong Kong. However, by way of an example regarding a non-Hong Kong resident enterprise conducting business in the provision of online audio, video and web conference services, the DIPN indicates that the IRD takes the position that the functions performed by a data centre or server PE of such non-Hong Kong resident enterprise form an “essential and significant part” of the enterprise’s business. This would be the case despite the enterprise having no service providers, employees or office in Hong Kong, i.e. all the other core operations and all the 20
human functions important to the business are performed outside Hong Kong. The IRD then takes the position that profits attributable to the PE in Hong Kong of the non-Hong Kong resident enterprise, are ascertained based on the transfer pricing (TP) rules under the authorized OECD approach (AOA), and would be chargeable to tax in Hong Kong. Commentary Under the recently enacted section 50AAK of the IRO, a non-Hong Kong resident enterprise which has a PE in Hong Kong is regarded as carrying on a business in Hong Kong for the purposes of section 14 of the IRO. However, to be chargeable to tax in Hong Kong under section 14, apart from carrying on a business, the relevant “profit-producing transactions” of such an enterprise must also be undertaken in Hong Kong – the territorial source principles as developed by the courts over the years. It is true that under the TP rules, certain profits would normally be attributable to such a PE of a non-Hong Kong resident enterprise, generally based on the functions performed, the assets used, and the risks assumed by the PE. However, DIPN 60 Attribution of Profits to Permanent Establishments in Hong Kong also explicitly acknowledges that the TP rules are only relevant to determining whether the profits as reflected in the accounts are arms’-length or adequate. Once the arms’-length profits are ascertained, Hong Kong’s source principles need to be applied in order to determine whether those profits are chargeable to May 2020
tax under section 14 of the IRO, based on the extent to which the relevant “profitproducing transactions” are undertaken in Hong Kong. This process is referred to as the “two-step” approach to determining chargeability to tax under section 14 . Such a process is required given that the TP and the source rules may not converge in many instances. The IRD has not given detailed elaboration in the revised DIPN on how source of profits would be determined subsequent to adopting the AOA to attribute profits to the Hong Kong PE, or how TP rules would interplay with the established source rules. However, a literal reading of the DIPN in effect appears to indicate that as a result of the recent change in the definition of PE, the IRD considers that the TP and the source rules will converge in the attribution of profits to a server PE. However, as the example above showed, the profits attributable to the data centre or server PE in Hong Kong of a non-Hong Kong resident enterprise under the TP rules could be irrelevant to determining whether any of the profits of the enterprise can be regarded as being sourced in Hong Kong. In fact, consistent application of the source principles in reverse would seem to require that if the source of the profits of the above Hong Kong resident enterprise is considered as being only located in Hong Kong, then the source of the profits of the non-Hong Kong resident enterprise should be considered as being located wholly outside Hong Kong. As such, none of the profits of the non-Hong Kong resident
enterprise should be chargeable to tax in Hong Kong. Taxpayers would welcome the IRD’s clarification on the above apparently inconsistent application of the source principles to the two opposite scenarios as illustrated in the revised DIPN. Organizations engaging in digital economy and e-commerce businesses should keep abreast of the rapid tax development in Hong Kong in light of DIPN 39. The new concept of a “server PE” can expose many non-Hong Kong resident enterprises to Hong Kong profits tax that was not previously applicable under the old DIPN 39. Therefore, it is important to seek professional tax advice where necessary to make sure the tax exposure is addressed appropriately.
This article is contributed by Jo An Yee, International Tax and Transaction Services Partner, Technology, Media and Telecommunications Tax Leader – Hong Kong at EY; Patrick Kwong, Executive Director and Kathy Kun, Senior Manager, of Ernst & Young Tax Services Ltd. 21
NAVIGATING CHINA’S
June 2020
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TAX SYSTEM Experts at the Institute’s China Taxation Conference last month covered strategies for navigating the Mainland’s complex tax system and the latest developments that members should keep up to date on. Eric Chiang and Paul Smith report Photography by Calvin Sit
SPEAKERS: (Top row, from left) ANDREW FENNELL Senior Director, AsiaPacific Sovereign Ratings, Fitch Ratings CECILIA LEE Partner, Transfer Pricing Services, PwC TRAVIS LEE China Tax Director, KPMG (Bottom row, from left) SARAH CHAN Partner, Tax and Business Advisory Services, Deloitte China WILLIAM CHAN Partner, Grant Thornton Tax Services ANDY LEUNG Tax Partner, Indirect Tax, EY June 2020
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hile this year’s China Taxation Conference was a more low-key affair, held as a webinar, it was still well-attended and the presentations and discussions remained insightful. The roundtable panel discussion featured a case study (see sidebar on page 27) about a multinational group engaged in research and development (R&D) and sales across multiple jurisdictions and subsidiaries, including one in the Mainland. The holding company and the subsidiaries have a longstanding cost sharing agreement (CSA) to share the R&D cost of the company’s flagship software according to the sales in each jurisdiction. The Mainland subsidiary has been asked to perform a self-evaluation on its tax filing positions by the tax authority (TA). 23
Cost sharing
William Chan, Chairman of the Institute’s Taxation Faculty Executive Committee, Partner at Grant Thornton Tax Services, and moderator of the panel, began by noting that CSAs were very common for groups with cross-border R&D and sales. He asked panellist Cecilia Lee, Partner, Transfer Pricing Services, PwC, how the Chinese tax authorities would look at CSA arrangements in general. Cecilia Lee replied that CSAs are not new in the China tax system. “The original objective of having a CSA is to encourage people to engage in more activities in intangible assets, or intellectual property (IP), such as R&D, activities which require labour services,” she said. “When labour services are involved, the TA may argue that the arms’ length principle applies.” The fundamental rules for allocating the cost among entities would be based on the reasonably anticipated benefit, which may reference the projected income of the project, Cecilia Lee says. There are benefits to coming to agreement with the TA. “It is a blessing if you manage to agree on the appropriate tax treatment for cost sharing. But if the TA doesn’t agree to that tax treatment, they may regard that as a royalty payment, and withholding tax kicks in,” she highlighted. Finally, another benefit of getting an agreement with the TA on the CSA treatment is that the quantum of the payment can fluctuate. However, William Chan pointed out that it may not be easy to quantify the reasonably anticipated benefit.
Interaction with income tax William Chan then discussed the corporate income tax (CIT) implication if a CSA payment is regarded as a royalty by the TA. He asked Sarah Chan, Deputy Chairman of the Taxation Faculty Executive Committee and Partner, Tax and Business Advisory Services, Deloitte China, how such a case would be handled. She advised that “when looking June 2020
at CIT deductions, the questions are ‘why should the activity be performed outside China and how critical is the activity to the Mainland subsidiary?’ and ‘is the level of reward in line with the activity performed?’ The matching concept applies.” She concluded that the TA would allow deductions based on the totality of facts nowadays. Whereas, in the past the TA may let you claim the deduction as long as you present a service agreement to them. This imposed restrictions on companies said William Chan. “This could mean that it is rather inflexible. Say if I subcontract certain activities to overseas group companies because I don’t have capacity to handle them, does it make the expenses nondeductible?” he asked.
Sarah Chan had seen a lot of multinationals use that as a defence. “The TA accepts companies’ argument that ‘we centralize certain functions for better efficiency, rather than maintaining a small team in China for the function.’” But, she said that TAs may challenge companies if they are creating intangible assets based on accumulated local knowledge. Cecilia Lee said that the TA had become very sophisticated in their tax investigations. “When they examine expenses they might do third-party benchmarking, using data from other enterprises or they might even get quotations from a service company, to determine whether it is really necessary to use head office functions,” she noted. Travis Lee, member of the Taxation Faculty China Tax Sub-committee,
William Chan (left), Partner, Grant Thornton Tax Services and Sarah Chan (right), Partner, Tax and Business Advisory Services, Deloitte China.
“Enterprises need to know what their peers are doing. You may not be able to defend your position by just telling the authority what you are doing to justify the deduction nowadays.”
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Andy Leung (left), Tax Partner, Indirect Tax, EY and Travis Lee (right), China Tax Director, KPMG.
and China Tax Director, KPMG echoed this. “Unlike in the past where they may accept the onesided explanation of a company, now they might undertake third-party benchmarking, before agreeing to the taxpayer’s assertion,” he said. Sarah Chan agreed. “Enterprises need to know what their peers are doing. You may not be able to defend your position by just telling the authority what you are doing to justify the deduction nowadays.”
VAT troubles
Sarah Chan questioned how valueadded tax (VAT) works in transfer pricing (TP). Andy Leung, Tax Partner, Indirect Tax, EY Hong Kong, highlighted that CSAs can be tricky from a VAT perspective. “Assuming they can make outbound payment, will the payment be subject to VAT?” he asked. “VAT is imposed on taxable services. Is the activity performed under the CSA a service? Technically it is not.” Explaining cost sharing between a head office
About the case A group is engaged in software development and distribution selling business-to-business software. The holding company is an incorporated company in the United States, with subsidiaries in different jurisdictions that maintain their own research and development (R&D) teams. The holding company is also the R&D headquarters and works closely with the subsidiaries’ R&D teams. The holding company and the overseas subsidiaries entered into a cost sharing agreement (CSA) in 2010. The R&D cost of the flagship software is shared among all these entities according to the sales of the local jurisdictions. The intellectual property (IP) rights of the flagship software is co-owned by all these entities. The share was initially allocated to the entities in accordance with the turnover ratio projection and is adjusted June 2020
and a branch to the TA may be easier than explaining arrangements between a parent company and a local subsidiary. “Municipal tax authorities, which may not have the same level of sophistication as the state TA, may not be receptive to this idea,” he said. For Travis Lee, issues can occur if there is a lot of uncertainty in the CSA. “I would suggest that the taxpayer talk to the TA in advance to try understand their interpretation of the arrangement. If a similar arrangement got an
when there are changes to the number of subsidiaries in the group, and only once a year after the accounting year end date. Changes are documented in an addendum to the CSA, with considerations for the change in the IP rights ownership put through in the intercompany balances. This is an internal process, though the group have documents to support changes, the group has not informed any external authorities about them. The group does not sell software license rights to the users. Instead, users are charged on an annual subscription basis. The group company in Hong Kong acts as the group corporate treasury centre (CTC) and all payments in the Asia-Pacific region made via the online payment gateway are collected by the Hong Kong subsidiary. For example, if the Internet Protocol address of a user is in China, the revenue collected would be classified as income to the China subsidiary. The CTC charges 5 percent of revenue collected as a service charge and remits the balance to the subsidiaries on a monthly basis. 25
Andrew Fennell (left), Senior Director, AsiaPacific Sovereign Ratings, Fitch Ratings and Cecilia Lee (right), Partner, Transfer Pricing Services, PwC.
adverse ruling before, it might be difficult to get the transaction treated the way you want,” he said. He also pointed out the issue of multiple municipal tax authorities involved in a case. “If a transaction involved multiple locations within China, it might be difficult to entertain all the requests from all the authorities,” he noted. Travis Lee cautioned enterprises to be mindful of how agreements with lower-level authorities might be viewed higher up. “If you have a very good relationship with the local tax bureau, you might consider that it shouldn’t be a problem to reach an agreement with them, but these deductions might be raised to the municipal tax bureau, which might scrutinize it further,” he said.
Reimbursement rather than provision
William Chan turned the focus onto whether the payments could be regarded as expenses rather than service fee. “For the reimbursement of expenses rather than service fee payment, do I need to withhold VAT? Is there any means that I can convince the TA that payment is expense reimbursement rather than June 2020
service fee such that no VAT should be levied?” The payment should theoretically be regarded as expense reimbursement. Andy Leung suggested that the company begin by clarifying with the TA that it’s a collection and payment, rather than a payment for services. “You need to explain the arrangement to the TA. If there is no precedent, you need to wait and see, but if the company needs to remit payment and cannot wait for clearance, paying VAT on a withholding basis as if the payment were a service fee and claim input tax credit is a quick fix. Yet, you could argue that the services were performed entirely outside of China such that no VAT should be levied, but this would require some technical analysis on the fact pattern,” he said. But, again, different local tax authorities may take different views on the nature of the payment. “The burden of proof that all services were rendered outside China is on the taxpayer. Be prepared for the TA to come back and say ‘no’ if you cannot prove it,” he warned. Andy Leung added good documentary evidences showing the services were rendered outside China is critical in reaching an agreement with the TA.
William Chan noted that under the company’s CSA, certain activities are performed in China. “This could be fatal to your argument that the payment is for all services rendered outside of China,” he said. “This really induces complexity to the case. You may need to segregate the two parts for a clean case, i.e. one for services at the local level, and one for services outside China,” responded Andy Leung.
Permanent establishments
Sarah Chan commented that permanent establishments (PE) was another important consideration. “In the CSA, most cases would have R&D elements. Often the parent company would send in technical staff to set up the local R&D team. Physical presence of the foreign workers may create PEs in China,” she said. Presenting the outbound payment as fee for services rendered entirely outside China could open a can of worms that the TA may counter that the fee was related to the PE in China, which could lead to additional CIT liabilities, she continued. For William Chan, this really
“The burden of proof that all services were rendered outside China is on the taxpayer. Be prepared for the TA to come back and say ‘no’ if you cannot prove it.”
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An uneven recovery adds a complication to the CSA. “The TA let the local entity claim tax deductions, but CIT may still be payable by the PE.” Sarah Chan had seen lots of cases of groups with CSAs. “It is important for them to appreciate that they may be difficult – particularly at the level of the local TAs.” Cecilia Lee recommended that groups commission an independent report to document the expenses of different jurisdictions. “This could serve as a very good defence to justify on an allocation basis,” she said.
Corporate treasury centre
The group has a corporate treasury centre (CTC) in Hong Kong, which collects all payments in the region and charges a 5 percent fee. William Chan asked, what is the tax and foreign exchange implication of the revenue of the Mainland subsidiary and service fee charged by CTC? For Andy Leung, the income nature would dictate the VAT consequence. Fees for IT support service and revenue for sales of software would attract VAT at 6 percent and 13 percent respectively. “The terms of the distribution agreement with the customers are critical to determine whether the revenue would be regarded as a service fee for IT support or revenue for sales of software by the Mainland subsidiary,” he said. The fact that the IP is co-owned creates additional VAT complications. Unlike many other jurisdictions, foreign companies at the moment cannot register only for VAT purposes in China. “If the agreement is badly worded and the TA considers all the group entities are collectively selling the license to the user, an adverse VAT outcome could result,” he noted. “It is critically important to identify who is doing what in order to negotiate with the TA.” “The devil is in the details,” said Andy Leung. “You need to make it quite detailed, so that the TA will know the exact identity of the payment and not to re-characterize the payment in a certain way that would make it unfavourable to the taxpayer.” Sarah Chan recommended looking at the CIT implications from a different angle. “According to the case, the Mainland subsidiary would receive 95 percent and the CTC would charge 5 percent for the services rendered. Setting aside whether the 5 percent is a justifiable amount for CIT, the difference may not be as drastic as VAT. No matter what income we are recognizing, we are still paying CIT at 25 percent,” she noted. Travis Lee commented that according to the prevailing foreign exchange control regulation, every transaction should be recognized by itself. “In this case, the CTC is doing a netting which is not in line with the prevailing regulation,” he said. “There has been loosening of the rules recently, so the taxpayer may not need to go through the State Administration of Foreign Exchange to get the transaction done.” The operation of the Chinese entity may not be affected to such an extent nowadays. William Chan summarized the discussion of the company’s operations as: “foreign exchange is a manageable problem, VAT could be a problem, but TP will always be a problem.” June 2020
The conference began with a presentation on Mainland China’s economy, and its uneven recovery from the COVID-19 pandemic. Andrew Fennell, Senior Director, Asia-Pacific Sovereign Ratings, Fitch Ratings, started by pointing out that some parts of the economy were recovering very rapidly, but there are concerning signs about others. With the improving public health situation, the expectations would be that daily life would begin to return to normal. But he warned that it wasn’t that easy, and that the evidence is that a full recovery, to an economy similar to that before the pandemic, will be a lot slower. The recovery is being driven by the policy-drive areas of the economy. “The industrial sector is very much leading the way. Looking at industrial production, there was a very sharp decline, but there has been a quite meaningful recovery,” he noted. Policydriven fixed asset investment also showed resilience. He pointed to utilities and infrastructure as sectors that had recovered quicker and are going to benefit from announcements made at the National People’s Congress. A surprising takeaway from the pandemic is how resilient the property sector has been. “The sector is very important for growth and the stability of the economy. Since the depths, this has recovered,” he said. While the market is not where it was in 2019, it has returned to 2018 levels. “On the demand size, mortgage loans are growing roughly 20 percent per year. There still continues to be demand for residential property,” Fennell commented. “Developers, having taken a pause, are beginning to make investments,” he continued. But to demonstrate that it is very much an uneven recovery, he pointed to the consumer sector. Headline retail sales contracted by roughly 20 percent in February, and while they have picked up since, they are still below those of 2019. Drilling down, the data shows that people are still concerned about social distancing, and that sectors like restaurants and bars had experienced more severe contractions. “The public health situation has improved but people don’t have the full confidence to go out in the same way and engage in social activities,” he said. On unemployment he pointed out that the official data suggested an urban unemployment of 6 percent, but was survey-based. “There are reasons to believe that many of the migrant workers, who serve a very important role in urban China, are not fully reflected in the statistics,” he commented. Fitch Ratings estimated that including some of these migrant workers who have lost their jobs or returned to the countryside for Chinese New Year and were unable to return to urban areas, “the urban unemployment rate could have been as high as 18 percent during the pandemic.” Finally he turned to small- and medium-sized enterprises (SMEs), which account for around 80 percent of employment, and over half of gross domestic product, but are too small to be captured in official statistics. According to data from Tsinghua University, revenues were down 40 percent compared to 2019. “SMEs and consumers have borne the bulk of the shock during the pandemic. They also look to be the areas of the economy that are recovering more slowly,” he said. “Because of this partial recovery, we do think the economy will grow at under 1 percent this year. Clearly unprecedented,” he said, before ending on an upbeat note. “We do have it recovering significantly in 2021.” 27
Taxation of charities A look at the IRD’s revised tax guide for charitable institutions On 21 April 2020, the Hong Kong Inland Revenue Department (IRD) published a revised version of its Tax Guide for Charitable Institutions and Trusts of a Public Character, addressing various key issues concerning taxation of charitable institutions. This is an evolving area of tax law in Hong Kong as the importance of the work done by charitable institutions is increasing. It is, therefore, crucial for taxpayers in the sector to understand the basis on which they will be taxed. The revised tax guide provides practical guidance on the IRD’s views in respect of assessing taxable profits derived by charitable institutions as well as on specified requirements to qualify for the tax exemption provided under Section 88 of the Inland Revenue Ordinance (IRO).
Background Section 88 of the IRO provides that approved charitable institutions are exempt from profits tax (as well as stamp duty and business registration fee) where certain conditions are met. While a charity can seek to obtain such a tax exempt status from the department, the IRD is not empowered to register or govern charities. The charity status is important in practice not only because of the tax exemption position, but for the ability to accept donations, which may be deductible for tax purposes by the donors if certain conditions are met. Section 88 does not contain a clear definition of what charitable purposes are, with the IRD using the well-known “four heads of charity” to characterize charitable purposes. These were derived from an 1891 United Kingdom House of Lords decision, while there are more recent court cases and actions in the U.K., where the Charity Commission (a governance body regulating charities) has evolved the definition of “charitable purposes.” In addition to those traditional June 2020
charities such as hospitals, youth organizations, schools, religious bodies, etc. there is an increasing number of charities being established in Hong Kong, as the community is willing to give support to the underprivileged groups. There are also charities or foundations established by corporate groups as part of their corporate social responsibility initiatives. As the IRD is not empowered to regulate charities, the revisions have not focused on providing guidance on what are “charitable purposes.” The IRD has, instead, attempted to provide more clarity on the tax exemption status in the revised guide.
Overview The IRD has recently updated the guidelines twice, firstly in connection with the tax exemption available to charities in September 2019, and secondly by providing more examples to clarify their position in April 2020. The key highlights from the revised guide are summarized below. Carrying on a business The guide confirms that a charity “carrying on a trade or business” in Hong Kong should generally be chargeable to profits tax, unless it can fulfil specified conditions under Section 88 of the IRO. Regarding the question of whether a charity is “carrying on business” in Hong Kong, the IRD provides that while the totality of facts would be considered, the key to determining whether the activities carried on by a charitable institution amount to the “carrying on of a business” are: (i) the intention of carrying on a business; (ii) the nature of the activities performed, particularly whether they have a profit-making purpose; (iii) whether such activities are repeated and regular or organized in a businesslike manner (i.e. including the keeping of books, records and the use of a system); (iv) the size and scale of the institution’s
activities including the amount of capital employed in them; and (v) whether the activities are better described as a hobby, or recreational activities. Exemptions from profits tax The guide reiterates that a charity can be exempt from profits tax in respect of the profits from a trade that contributes directly to an expressed object of the charity (i.e. a primary purpose of the trade/business) and/or a trade ancillary to the primary purpose trade that contributes indirectly to successful furtherance of the expressed object (i.e. an ancillary trade/business). The revised guide also considerably expands the list of example activities that may be exempted from profits tax. The guide also includes some relevant comments regarding charges by charitable institutions for services provided or usage of facilities. Specifically, the IRD confirms that if a charge is imposed on the provision of services or usage of facilities by a charitable institution, the said charge must fulfill the purpose of public benefit, such as non-exclusion from the poor or sufficient provision must be made for the poor to benefit in order for income earned to qualify for exemption under Section 88. Financial investments The guide further elaborates on financial investments made by charitable institutions. Specifically, it clarifies that if a charity invests by way of a discretionary account and the investment manager will act as the agent of the charity, the determination of whether the investments made by the investment manager on behalf of the charity are of capital or revenue nature is a question of fact and degree, which should take into account all the surrounding circumstances, including the investment mandate or pre-defined model portfolio and that the "badges of trade" should remain relevant for answering the question. 28
The revised tax guide establishes that if such financial investments directly further the charity’s objects and generate financial returns, such returns may not be chargeable to profits tax. Specifically, it confirms that the following income, gains or profits are exempted from profits tax: • Dividends received from a corporation which is subject to Hong Kong profits tax; • Interest on, and any profit made in respect of a bond issued under the Loans Ordinance or the Loans (Government Bonds) Ordinance, or in respect of an Exchange Fund debt instrument or in respect of a Hong Kong dollar-denominated multilateral agency debt instrument; • Interest, profits or gains from qualifying debt instruments (issued on or after 1 April 2018); • Interest that is derived from any deposit placed in Hong Kong with an authorized institution, excluding interest received by or accrued to a financial institution; • Interest on and any profit made in respect of renminbi sovereign bonds and non-renminbi sovereign bonds; and • Interest on and any profit made in respect of debt instruments issued in Hong Kong by the People’s Bank of China. Rental income In respect to a charity leasing out its properties to earn rental income, which would be applied for charitable purposes, the revised guide provides guidance on whether such activities amount to the carrying on of a business and if the respective rental income should be subject to profits tax. The guide clarifies that if the property letting is not carried out in the course of the actual carrying out of the charity’s expressed objects, the rental income earned should be chargeable to profits tax. On the other hand, if the property letting is exercised in the course of the actual carrying out of the charity’s June 2020
expressed objects and the rental income is used solely for charitable purposes and not expended substantially outside Hong Kong, the rental income should not be chargeable to profits tax. This has notably wide implications to charities in Hong Kong, as it is fairly common that founders of charities would contribute immovable properties to charities as seed money for generating a sustainable income stream to support the ongoing operations of the charities. The IRD has expanded the scope of property letting by charitable institutions to cover letting out of properties to other charities, which chargeability to profits tax of the respective rental income may be subject to the aforementioned considerations. Tax obligations With regards to tax obligations applicable to charity institutions, the revised tax guide establishes that if the institution fails to comply with the IRO including informing the IRD about its chargeability to tax, the commissioner of the IRD may compound the relevant offence under Section 80(2) (i.e. accept a monetary settlement instead of sanctioning the institution of a prosecution) and may also impose additional tax under Section 82A of the IRO. Approved charitable institutions should be mindful of their reporting obligations, and the consequences of non-compliance. Finally, it is worth noting that the revised tax guide reminds charities that, as an employer, they are required to report details of remuneration made to their employees for each year of assessment, commencement and cessation of employment and departure from Hong Kong similar to the general salaries tax obligations applicable to companies in Hong Kong. This is not a new reporting obligation, but an important point for charities to ensure compliance with the IRO.
Observations An update to the tax guide for charitable institutions is an undoubtedly welcome move in view of providing clarity to charities’ obligations under the IRO, where a lot of charities are operating under a simple structure that may not have appropriate resources that are familiar with tax matters. The fact that this revision to the tax guide has come only a few months after the last revision is quite rare. Yet, this indicates that the IRD is committed to providing further clarity and to enhance certainty in matters concerning the taxation of charitable institutions and their business activities in Hong Kong. The IRD’s clarified views on what income is exempt from tax will surely have an impact on charities’ financial capability of deploying resources for charitable purposes. Failure to comply with the tax and reporting obligations may potentially bring significant implications on an organization’s reputation, and may jeopardize the charitable organization’s status. Charities should consider seeking professional assistance to assess and review their current tax position in face of the new guidelines issued by the IRD and consider whether a restructuring is needed.
This article is co-authored by Alice Leung, Corporate Tax Advisory Partner, and Soraia Almeida, Corporate Tax Advisory Senior Manager, of KPMG China. 29
A summary of the taxation of offshore indirect transfers toolkit An in-depth look at a new toolkit on the taxation of offshore indirect transfers In June, the Platform for Collaboration on Tax (PCT), co-founded by the International Monetary Fund, Organization for Economic Cooperation and Development (OECD), World Bank Group and the United Nations (UN), released a toolkit on the taxation of offshore indirect transfers (OITs) providing guidance on tax treatment and implementation issues for developing countries when one country seeks to tax gains on the sale of interests in an entity owning assets located in that country by an entity which is a tax resident of another country. The toolkit is a technical reference or guidance instead of a law or an agreement with binding powers. In the absence of appropriate legal basis under domestic law to assert the taxing right on OITs, tax certainty cannot be assured. Nonetheless the guidance is welcomed by the tax professional community.
Background OITs, defined in the toolkit as “disposition of an indirect ownership interest in an asset, in whole or in part, in which the transferor of the indirect interest is resident in a different country from that in which the asset in question is located,” have emerged as a significant issue in many developing countries. Tax administrations may find tax collection on OITs a difficult task due to the complications, complexities and technical judgements involved. For taxpayers, different definitions, scope of taxable assets and interpretations in domestic laws in different jurisdictions lead to uncertainties. Taxation on OITs often relates to taxation on non-residents, which usually involves the allocation of taxing rights and economic interests between two or more jurisdictions. A more uniform approach to OIT taxation at the international level is therefore urgently required. It is accepted by the Model Tax Conventions (MTCs) of the OECD and the UN that capital gains derived from OITs of “immovable” assets can be taxed by the July 2020
asset location country. The toolkit provides analysis of two options for OIT taxation, with a focus on the perspective of developing countries. The key questions addressed include: • What considerations arise in deciding whether transfers should be taxed in the country in which the underlying asset is located? • Which types of assets should be included in the OIT taxation bases? • How can such taxation, if adopted, be best designed and implemented from practical and legal points of view? The toolkit proposes that location countries may wish to tax OITs of at least those assets which are immovable, i.e. within the meaning defined in both of the OECD and UN MTCs, and perhaps other assets that also generate location specific economic income. The toolkit suggests two models for domestic legislation for location countries wishing to extend their taxing rights. The toolkit also provides enforcement and tax collection guidance. As previously stated, some location countries may wish to tax gains realized on OITs as is currently the case for direct transfers of immovable assets. Those location-specific incomes exceed the minimum returns projected by the investors and cannot be generated in other jurisdictions. These assets might include, for instance, telecommunication licenses and other rights granted by local governments. The PCT advocates that location countries should have the right to tax OITs, and such assets should at least include property that generate location-specific income (such as natural resources, including physical property and related rights, regional telecom licenses or other rights), including those thoughts of as “immovable property,” regardless of whether equivalent tax in regard to the transfer would be paid elsewhere. In other words, such taxation could apply not only as an anti-avoidance device to combat
“double non-taxation,” but rather could constitute a fundamental aspect of the country’s domestic tax laws.
The two OIT taxation models The toolkit provides two OIT taxation models, which are not mutually exclusive. However, if both models are adopted, an ordering rule is required to ensure they do not apply at the same time. Appropriate enforcement and collection rules are also critically important. The detailed treatments, tax enforcement and collection rules under these two models are discussed below: Model 1: impose tax on a local assetowning entity and treat it as disposing of and reacquiring the assets (e.g. Corp. A in Figures 1 and 2 on page 41) Model 1 is designed to tax the actual owner of the assets (e.g., Corp. A), rather than the non-resident seller, by treating the actual owner as disposing of and reacquiring the assets for their market values. Tax treatment under Model 1 Key technical points regarding tax treatments under Model 1 are summarized as follows: • Tax the unrealized gain, recognize losses where there are no accrued gains. • Safe harbour rules may apply on corporate reorganization. • Tax liability is triggered if the sale led to effective change in control by more than 50 percent. • Change of control – the toolkit encourages jurisdictions to include definitions for “ownership” or “change of ownership” in the relevant domestic provisions. • Deemed disposal of assets – where a change of control occurs, the local assets owner is deemed as disposing of the assets for their market value. • Reacquiring the assets – the local entity is regarded as reacquiring the assets at the market value during the indirect 30
Illustrative examples of different scenarios of indirect transfers, simple and complex
(Source: Summarized based on the toolkit.)
Figure 1: A simple example of an OIT structure
Corp. P Share of B
Corp. M Share of A
Country X
Corp. B Share of A
Transfer
(Before sale) Country Y Country Z
Corp. A Asset
Scenario 1: Corp. B, resident in Country Y, sells its shares in Corp. A to Corp. M, resident in Country X. This is a direct transfer of the shares of A, and an indirect transfer of the assets held by Corp. A that are located in Country Z. Figure 2: A complex example of an OIT structure Corp. P
Corp. M
Share of C
Share of B
Corp. C Share of B Country X
Transfer
(Before sale)
Corp. B Share of A Country Y Country Z Corp. A Asset
Scenario 2: Corp. C disposed Corp. B. This is a direct transfer of the shares of B and an indirect transfer of Corp. A together with the underlying assets held by A in Country Z.
transfer to avoid double taxation in subsequent change of control. • Reset liabilities – both assets and liabilities of the local asset-owning entity are reset for ease of administration. The introduction of domestic tax provisions does not involve complex issues such as corporate reorganizations, minority shareholders, joint venture arrangements, valuation difficulties, listed securities, and the treatment of losses under Model 1. Countries could introduce carve out rules according to their individual circumstances so as to effectively address concerns such as scenarios where the change of ownership is triggered by an initial public offering. July 2020
Under Model 1, the local asset-owning entity shall be subject to the ordinary compliance rules applicable to resident taxpayers. Comments on Model 1 The application of Model 1 is relatively simple. However, there are certain shortcomings, namely: • Double taxation may arise as the nonresident seller may have to pay tax in its residence country but there would be no foreign tax relief available for the seller as they are not liable for taxes in the local asset-owning country. • As the local asset-owning entity is not the entity receiving the proceeds from
the OIT, it may have liquidity problems in meeting the tax payments. • Model 1 undermines the functions and risks of the separate legal entities, specifically at the relevant tiers of investment holding entities. • The compliance burden on the local asset-owning entity may increase as it has to monitor the changes of its own ownership over which it has no control. Model 2: tax the non-resident seller (e.g. Corp. B in Figure 1 and Corp. C in Figure 2 in above diagram) The OIT is treated as being made by the non-resident seller (the actual seller), but the gain is deemed as sourced from the 31
country where the assets locate. As shown in Figure 1, the gain realized by Corp. B (Country Y resident) shall be seen as sourced from Country Z where the assets are located, thus Country Z shall have the right to impose tax. Tax treatment under Model 2 The source rule is combined with the taxable asset rule: • Source rule: The entire gain shall be subject to tax in Country Z when the value of the share transferred is principally (e.g. more than 50 percent) derived from the assets in Country Z. • Taxable asset rule: under a taxable asset rule, Country Z may choose to tax the entire gain or on a proportionate basis by considering factors such as the proportion of value attributed to the assets. When formulating domestic tax rules, countries shall take into account any existing tax treaty obligations. With respect to the scope of the interest which is to be subject to tax in Country Z, Model 2 provides three options: • All interests, provided the value of the interest sold is principally (over 50 percent) derived from that asset. • Only more significant interests (e.g. interests of 10 percent or more of the asset). • Interest with the nominal value over certain threshold (e.g. US$1 million). Exemptions are suggested to certain transfers such as transfer of shares of companies listed on a stock exchange or shares transfer in the course of a corporate reorganization, etc. Enforcement/collection rules under Model 2 The non-resident seller who needs to pay tax in Country Z due to an OIT usually needs to file a tax return in Country Z. A withholding or notification/reporting mechanism can be established to promote the tax enforcement/collection and improve tax compliance, for example, control measures on local asset registration change. Comments on Model 2 Unlike Model 1, Model 2 preserves the separate legal entity distinction between the local asset-owning entity and its relevant tiers of parent entities. The nonJuly 2020
resident seller can claim foreign tax credit in its resident country, which effectively avoid double taxation. However, Model 2 is more demanding for tax administrations. The compliance burden on local asset-owning entity is increased for monitoring ownership changes. Besides, double taxation may arise on subsequent disposal of interests in transferees (e.g. Corp. M) as assets after the OIT will not be stepped up to market value.
Points to note The toolkit represents the analysis and conclusions of the tax staff of the PCT’s four partner organizations but not necessarily the official views of the organizations’ member countries. Further, the cases in the toolkit are solely for illustration purposes and should not be relied upon for other purposes. The appropriate choice among the two models will depend on countries’ circumstances and considerations. The toolkit does not provide a one-size-fits-all solution. Developing countries in general have concerns that OITs might be used inappropriately to avoid capital gains taxation in the assets location country. This issue is not covered in the OECD’s Base Erosion and Profit Shifting (BEPS) project, but it has been identified by developing countries as significant. This toolkit is for developing countries to assist their responses to international tax issues, which the BEPS project has not addressed. The toolkit mentioned that a general anti-avoidance rule (GAAR) could be used as a last resort to tax an OIT gain in appropriate circumstances. However, it may not be easy for countries with a weak administrative capacity to apply a GAAR rule successfully. Some countries have adopted taxing mechanisms that operate in a similar way to a GAAR by seeking to, in effect, collapse the multi-layer holding structure and treat the ultimate non-resident seller of the interests as the seller of the local assets, who realizes a gain with a local source. Application of this kind of rule is dependence on successful establishment of international tax avoidance is involved. Otherwise, asset location country may not have the taxing right on the OIT gain. Hence, the toolkit considers this kind of rule only have limited scope application. In Mainland China, the corporate income
tax (CIT) regime provides that gains on direct transfers of assets located in China shall be taxed. The prevailing Public Notice 7 – a circular issued under GAAR – further specifies that OIT by non-resident person without reasonable commercial purpose but merely used to avoid CIT shall be re-characterized as a direct transfer of a China taxable asset. The taxing mechanisms adopted by China is to collapse the multi-layer holding structure and treat the ultimate non-resident seller as the seller of the local assets, who realizes a gain with a local source. The toolkit commended the Chinese approach to indirect transfers of assets as relatively defensive and discretionary: OITs may be taxed if they are deemed to be structured to evade paying tax in China. The tax certainties of this kind of approach might be a concern to taxpayers if there is no enough detailed and consistent interpretations and implementation guidance at the state level.
Conclusion The toolkit provides technical reference for both administrators and taxpayers, especially in the case of disputes over taxing rights. Location countries should have the right to tax OITs, and such assets should at least include property that generate location specific income (such as natural resources, including physical property and related rights, regional telecommunication licenses or other rights). However, this does not mean that location countries should always tax OITs. Non-tax factors such as capacity, needs of tax revenue and sentiments of foreign investment, etc. should also be considered. A more uniform and coordinated approach to OIT taxation can contribute to coherence in international tax arrangements and enhance tax certainty. Furthermore, it is necessary to formulate a clear and uniform interpretation of domestic laws and regulations to avoid uncertainty This article is and unfairness in contributed by implementation of Jane Hui, Leader the provisions. of China Tax Centre and Partner, International Tax and Transaction Services, of EY 32
A new limited partnership fund regime for Hong Kong A look at how the new Limited Partnership Fund Bill will encourage local investments Background The passage of the Limited Partnership Fund Bill on 9 July is an important development for the funds industry in Hong Kong as the government looks to encourage funds to domicile here. Asian-focused funds have always looked to Hong Kong as a regional hub in which to situate their investment teams. However, these funds have typically established or domiciled their collective investment vehicles in jurisdictions such as the Cayman Islands because such jurisdictions provide a regulatory framework with which investors are familiar, and a tax neutral investment platform which allows investors to be taxed on investment returns in their home jurisdictions. We anticipate that the limited partnership fund (LPF) regime will prove beneficial to asset managers looking for an alternative jurisdiction to establish their offshore funds. Tax treatment of an LPF An LPF, like any other private equity (PE) fund, will qualify as exempt from tax if it satisfies all of the conditions of the existing unified funds exemption (UFE). There is no new or separate exemption that will apply to an LPF. While the proposed LPF regime should put Hong Kong on par with other leading regulatory regimes for fund groups, the ability for the regime to entice fund groups to domicile in Hong Kong will ultimately depend on the attractiveness of domestic tax exemptions in Hong Kong for LPFs. A key consideration by limited partners in deciding whether to commit capital to a fund established in Hong Kong is for the LPF not to be subject to direct taxation in Hong Kong. Having a fund domiciled in Hong Kong with its investment team should also align the July 2020
fund with the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting initiative and thereby make it easier for fund groups to access tax treaty benefits into the jurisdictions they invest. Most LPFs should satisfy the exemption and qualify as exempt, but for some, the current UFE may not apply to the fund’s investment gains, or the conditions may simply be viewed as more onerous to comply with than in comparable jurisdictions that exempt PE funds from direct taxation. How to make the LPF regime work To ensure the success of the LPF regime and put Hong Kong’s overall fund regime ahead of other jurisdictions, modifications to the UFE and the broader tax regime in Hong Kong are required achieve this, including: • Broadening the asset classes to include all investment gains made by a fund, including treating interest income as qualifying income. Singapore has amended its fund exemption provisions to specifically cater for credit funds to provide a specific exemption for interest income which has resulted in many of those fund groups establishing their Asian investment platforms in Singapore instead of Hong Kong. • Ensuring special purpose investment entities (SPEs) of the LPF can obtain tax residence certificates (TRCs). The inability to establish substantive activities in a Hong Kong SPE has been problematic when applying for TRCs from the Inland Revenue Department (IRD). The limited substance allowed in the SPEs at times also impedes the ability for SPEs to be eligible for tax treaty benefits with jurisdictions into which investments are made. Where
the LPF itself is able to avail of the benefits under the UFE, its SPEs should automatically be entitled to the same benefits. • Addressing the taxation of carried interest, given the IRD’s position. Conclusion The introduction of the LPF regime, alongside the open-ended fund regime primarily for hedge funds, will put Hong Kong firmly in the mix as an alternative location and on par with comprehensive regulatory frameworks elsewhere, and as such should provide an alternative location for general partners (GPs) and assets managers to domicile their funds. Importantly, GPs being able to appoint onshore or offshore fund managers, or alternatively act as the manager of the LPF themselves if they so choose, should greatly help simplify overall fund structures. The government should consider introduction of this initiative. If the government is able to implement the changes necessary to bring the fund tax exemption in line with other jurisdictions vying as a regional PE headquarters location then the LPF regime should be a boon for the asset management industry in Hong Kong.
This article is contributed by Darren Bowdern, Tax Partner, Head of Alternative Investments Hong Kong, Nigel Hobler, Tax Partner, Sandy Fung, Tax Partner, Anthony Pak , Tax Director, and Kasheen Grewal, Tax Director, at KPMG China 33
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IRD issues revised practice note explaining the tax treatment of financial instruments under HKFRS 9 A look at how HKFRS 9 will impact the accounting of fair value Legislative background Under Hong Kong Financial Reporting Standard (HKFRS) 9 Financial Instruments and its international equivalent International Financial Reporting Standard 9, more financial instruments for both assets and liabilities are required to be accounted for on a fair value basis. As held by the Court of Final Appeal in November 2013 in the case of Nice Cheer v. the Commissioner of Inland Revenue, profits or losses which would be regarded as being unrealized or anticipated for tax purposes may be recognized under such an accounting approach and should be treated as non-taxable or non-deductible as the case may be. The decision of Nice Cheer means that taxpayers would have to make tax adjustments to their accounting profits or losses recognized under HKFRS 9 to exclude unrealized profits or losses before they file their tax returns. Despite this decision, many taxpayers have expressed a desire to file their tax returns on a fair value basis. In so doing, these taxpayers hope to avoid the time and effort of tracking transactions on a realization basis for tax reporting purposes. In response to requests by such taxpayers, the Inland Revenue Department (IRD) has since the 2013/14 year of assessment accepted tax returns in which taxpayers have chosen to file on a fair value basis. To provide more clarity and certainty, a new law was enacted in February 2019 to codify this interim administrative measure into the Inland Revenue Ordinance (IRO). Under the new law applicable for years of assessment with a basis period commencing on or after 1 January 2018, taxpayers have to make a generally irrevocable election for the general alignment of the tax treatment of financial instruments with their accounting treatment as reflected in the profit and loss account under HKFRS 9. For taxpayers August 2020
who are temporarily exempted from applying HKFRS 9, e.g. insurers, the IRD has extended their acceptance of returns in which the assessable profits or losses are computed on a fair value basis. Furthermore, in respect of trading profits or losses, the new provisions only apply where the financial instruments concerned are revenue in nature and sourced onshore. In June 2020, the IRD issued revised Departmental Interpretation and Practice Note (DIPN) No. 42 to state how it will interpret and apply the new law in its assessing practice. Most of the views and positions taken by the IRD on the new law as stated in the revised DIPN were explained in a previous article published in the December 2018 issue of A Plus. This article focuses on the notable clarifications in the DIPN.
Notable clarifications detailed in revised DIPN 42 ECL for debt instruments acquired for trading purposes and measured at amortized cost or FVTOCI need not be claimed under section 18K(3) Within the general scheme of alignment under the new law, the taxability or deductibility of expected credit losses (ECL) is a notable exception. For debt instruments measured at amortized cost or fair value through other comprehensive income (FVTOCI), all ECL impairment losses are charged to the profit and loss account. However, under the new law, not all ECL charged to the profit and loss account are tax deductible. Deduction provisions for ECL Section 18K(3) of the IRO specifies that an impairment loss in the form of ECL recognized under HKFRS 9 will only be deductible provided that (i) either (a) the loans were made in the ordinary course of a money-lending business in Hong Kong, or (b) in the case of trade receivables, the
amounts were previously included as a trading receipt in Hong Kong; and (ii) the ECL are credit-impaired. Conversely, where a tax deduction for credit-impaired ECL is allowed, any writeback of the ECL will be taxable in Hong Kong under section 18K(4). The expression “credit-impaired” is not defined in the law but is defined in HKFRS 9, and this definition will apply to the interpretation of section 18K(3). In general, there are three stages of credit risk deterioration, and only ECL made at Stage 3 would be considered as credit-impaired. Revised DIPN 42 does not address the issue of whether a taxpayer who acquires debt instruments for trading purposes would be regarded as lending money in the ordinary course of a money-lending business in Hong Kong and, therefore, can claim credit-impaired ECL in respect of such instruments as deductible under section 18K(3). No separate ECL recognized for debt instruments that are FVTPL Unlike debt instruments measured at amortized cost or FVTOCI, no separate ECL will be recognized for debt instruments that are measured at fair value through profit or loss (FVTPL). As such, all components (including Stages 1 – 3 ECL where applicable) of the fair value changes of a debt instrument that is FVTPL, will simply be reflected through the profit and loss account as fair value changes of the instrument for a year. The IRD takes the position that the taxability or deductibility of the fair value changes of a FVTPL debt instrument, and is acquired for trading purposes, is not subject to the provisions of sections 18K(3)-(4) governing the taxability or deductibility of ECL. This position taken by the IRD, coupled with the alignment of the tax treatment of financial instruments with their accounting treatment under HKFRS 9 under the new law, means that all fair value 36
changes (regardless of their constituent components) of a debt instrument that is FVTPL and is acquired for trading purposes, would be taxable or deductible as the case may be. Equating the tax treatment for negative fair value changes of all financial assets held for trading purpose regardless of how they are measured under HKFRS 9 Revised DIPN 42 indicates that in certain circumstances the IRD is prepared to equate the tax treatment of financial assets that are measured at amortized cost or FVTOCI, and are acquired for trading purposes, with the tax treatment of financial assets that are FVTPL and are acquired for trading purposes. As a result, if an assessor is satisfied that financial assets measured at amortized cost or FVTOCI are acquired for trading purposes, ECL for such assets need not be claimed under sections 18K(3). Instead, for tax purposes, taxpayers can presumably make an adjustment in the tax computation as if the financial assets concerned were measured at FVTPL. In the event that such an “as-if” remeasurement would result in a negative fair value change of the asset, the hypothetical resulting debit to the profit and loss account could be claimed for a tax deduction. Revised DIPN 42 does not however address the issue of where a tax deduction is claimed on such an “as-if” basis, what would be the tax treatment if the ECL or other impairment losses for such a financial asset are subsequently fully written back and there are subsequent fair value gains of the instrument which are not reflected in the profit and loss account under HKFRS 9. Taxation of unrealized foreign exchange gains or losses In Nice Cheer, Judge To took the view that year-end translation gains or losses for transactions denominated in foreign currencies, before the underlying items are settled, are nonetheless realized profits or losses. However, since the profits or losses at issue in the case were year-end revaluation gains or losses in respect of securities held for trading purposes, but not year-end translation differences in foreign currencies, Judge To’s view on the matter is not binding, only an obiter. In this regard, revised DIPN 42 indicates August 2020
that the IRD adheres to the view that year-end translation differences in foreign currencies are unrealized profits or losses, thus falling within the realization principles established in the Nice Cheer decision. As such, as a matter of law, where such translation differences are not in respect of a financial instrument, the IRD cannot include any such translation gains for tax assessment. Conversely, taxpayers cannot claim any such translation losses for tax deduction. Where such translation differences are in respect of a financial instrument, the IRD can still treat these as non-taxable or nondeductible if the taxpayer has not made an election under the new law. However, a tax treatment following the realization basis will require taxpayers to undertake the burdensome task of tracking when the items denominated in foreign currencies are subsequently settled. Tax adjustments will then have to be made in the tax computation to account for the realized profits or losses for the relevant year of assessment. In order to relieve taxpayers of such a burdensome task, and as a matter of tax administrative practice, revised DIPN 42 indicates that taxpayers who have not made an election under the new law, can nonetheless consistently treat any unrealized year-end translation gains or losses for tax assessment or deduction purposes. Revocation of an election The election to be assessed on the fair value basis will cease to have effect under the following circumstances: (i) When the taxpayer ceases to prepare their financial statements under HKFRS 9; or (ii) The Commissioner of Inland Revenue (CIR) approves an application in writing by the taxpayer to revoke the election. The CIR may approve such an application where he is satisfied that there are good commercial reasons for the revocation and that avoidance of tax is not the main purpose, or one of the main purposes, of the revocation. Such a revocation will apply from the year of assessment as specified by the CIR. Whether there are good commercial reasons for revocation of an election is considered based on the facts and merits of a case. Nonetheless, revised DIPN 42
indicates that if a company’s reason for the revocation of its election is to conform with the tax reporting policy of a new parent company pursuant to a business merger or restructuring, the CIR would generally accept this as being a good commercial reason for the revocation. Under both (i) and (ii) above, section 18H(7) provides that all financial instruments held at the end of the year preceding the cessation year are deemed as being disposed of and reacquired on the first day of the cessation year on a fair value basis. The application of the deeming provision in section 18H(7) will have a tax impact where the financial instruments held on revenue account at the end of the year preceding the cessation year are not measured at FVTPL. For example, take the case of a debt instrument acquired at HK$10 million which is measured at FVTOCI at HK$12 million at the end of the year preceding the cessation year. As a result of the application of section 18H(7), HK$2 million (HK$12 million – HK$10 million) will be assessed in the year of cessation. This will be the case even though the instrument has not been sold, and under HKFRS 9 the HK$2 million fair value gain has been reflected in the other comprehensive income and not yet recycled through the profit and loss account. Nevertheless, the application of section 18H(7) will also mean that the cost basis of the instrument for tax purposes will be uplifted to HK$12 million for the purposes of calculating the subsequent profits or losses on disposal of the instrument. The above indicates that despite the clarifications made in revised DIPN 42, the tax treatment of financial instruments under HKFRS 9 can be very complicated in certain circumstances. Where necessary, taxpayers should seek professional tax advice. This article is contributed by Tracy Ho, Asia-Pacific Business Tax Services Leader, Patrick Kwong, Executive Director and Kathy Kun, Tax Senior Manager, Ernst & Young Tax Services Limited 37
Hong Kong revises DIPN on APAs to help manage tax uncertainties Key changes and aspects of the revised DIPN 48 With the enactment of the Inland Revenue (Amendment) (No. 6) Ordinance 2018 (BEPS and TP ordinance), the transfer pricing (TP) regime in Hong Kong has become more rigorous. Under the BEPS and TP ordinance, the Inland Revenue Department (IRD) is empowered to impose TP adjustments on either income or expense arising from nonarm’s length transactions between associated persons that give rise to a potential Hong Kong tax advantage. Taxpayers may face a penalty up to the amount of tax undercharged. Echoing the BEPS and TP ordinance, the Departmental Interpretation and Practice Notes (DIPN) No. 48 Advance Pricing Arrangement (APA) issued in 2012 has been revised (revised DIPN 48) to provide more guidance for taxpayers on the procedures and requirements to pursue APAs. The APA programme facilitates efficient management of controlled transactions and allows taxpayers to communicate with tax authority in a non-adversarial manner. It can also help to reduce unnecessary costs relating to tax audits and enhance certainty pertaining to controlled transactions. Overall, the revised DIPN 48 ensures a more streamlined, transparent and efficient APA application process for taxpayers. Key changes include the following: • Unilateral APAs are now accepted, in addition to bilateral and multilateral APAs, allowing taxpayers to enter into APAs with the IRD in relation to transactions with non-double taxation agreement (non-DTA) jurisdictions; • The three-stage process will replace the former five-stage process, which will streamline the procedures and August 2020
improve efficiency in concluding an APA. The level of documentation required at the early stage under the new procedures will be reduced, which represents more flexibility and may reduce the time taken to conclude an APA; • The coverage of APAs has been extended to include the attribution of profits to a permanent establishment in Hong Kong, and the relevant thresholds for APA applications have also been provided; and • The rollback of the TP methodology under bilateral and multilateral APAs is available, as such tax audit/TP inquiry of past years may be resolved with less penalty pressure.
Types and covered period of APA An APA is an arrangement concluded between a taxpayer and one or more tax authority that determines, in advance, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events etc.) for determination of the TP for controlled transactions. Depending on the number of jurisdictions involved and whether the jurisdiction(s) have signed a DTA with Hong Kong, taxpayers may consider a unilateral, bilateral or multilateral APA. The revised DIPN states that “In general, an APA will have a prospective application with a specific duration of three to five years.”
Thresholds of APA applications APA applications are subject to the following thresholds based on the expected amount of each category of
transactions. The applications relate to: a) S ales or purchases of goods: HK$80 million per annum; b) Service fees: HK$40 million per annum; c) Royalties: HK$20 million per annum; d) Business profits for an APA application relates to the attribution of profits to a permanent establishment in Hong Kong: HK$20 million per annum; or e) An APA application relates to transactions not falling within the categories (a) to (d) listed above: HK$20 million per annum. The above thresholds for sales or purchases of goods and other transactions are lower than the applicable thresholds for preparing Hong Kong TP documentation, suggesting that taxpayers who are not required to prepare TP documentation may qualify for an APA application. The revised DIPN 48 also expands the scope of APA applications to include the attribution of profits to a Hong Kong permanent establishment, the application threshold in relation to which is also specified, corresponding to the permanent establishment articles in the BEPS and TP ordinance. The IRD will review the application thresholds from time to time and may lower the corresponding thresholds based on the actual circumstances.
The three-stage APA application process The APA application process has been revised from five to three stages, which aims to streamline the overall process. The new stage 1 “Early engagement” is the combination of the previous 38
Summary of the APA application process Stage 1: Early engagement
• The taxpayer submits a request for APA and a draft case plan (including the process timeline) • The IRD sets up an APA team -T he APA team will evaluate the request, provide feedback and determine whether to invite a formal application • Preliminary discussions to develop a tailor made APA solution he solution includes the APA’s scope, type, the preferred TP -T methodology, etc. • The IRD invites the taxpayer to submit a formal application • The taxpayer submits a formal APA application • The IRD noti es tax authorities of relevant jurisdictions involved and sets out a timetable after relevant tax authorities agree to participate (applicable to bilateral or multilateral APA) • The taxpayer pays a deposit
Stage 2: APA application
• Analysis and evaluation he IRD’s APA team will thoroughly examine the information submitted -T by the applicant according to the consensus reached in stage 1 - The APA team may conduct interviews • Negotiation -D uring the negotiation, the APA team will prepare the terms and discuss them with the applicant he negotiation and exchange of information between the IRD and tax -T authorities of relevant jurisdictions are necessary in cases of bilateral or multilateral APA • Agreement - Upon agreement, the relevant parties enter into an APA
Stage 3: Monitoring and compliance
• Submission of annual compliance reports -T he taxpayer submits annual compliance reports providing details demonstrating the outcome of the application of the arm’s length methodology • The taxpayer is required to keep the records and data
stage 1 “Pre- filing” and stage 2 “Formal application,” which has reduced the information required to be submitted at an early stage. This minimizes the resources required for taxpayers before the IRD accepts the formal application. The new stage 2 “APA application” combines the previous stage 3 “Analysis and evaluation” and stage 4 “Negotiation and agreement,” thereby improving the efficiency and effectiveness of the negotiation process. The revised DIPN 48 provides a tentative timeframe for the early engagement stage which is six months and for the APA application stage which is 18 months. The timeframe for bilateral and multilateral APAs, however, depends August 2020
on the progress of negotiations with the competent authority(ies) of the DTA jurisdiction(s). In new stage 1, the APA team and the applicant will agree on an initial case plan – including the timeline for the whole process. This allows both parties to plan sufficient resources for negotiation and cooperation, improving the efficiency of the subsequent stages. The APA application process is summarized in the table above.
“More likely” to qualify for an APA The revised DIPN 48 states that the IRD will consider all the relevant facts and circumstances of each APA application.
It also includes “more likely” or “less likely” circumstances when the IRD will consider entering into an APA. If one or more of the following indicators are present, the chance of entering into an APA with the IRD will improve accordingly: • The TP methodology adopted under the proposed APA best achieves consistency with the Organization for Economic Cooperation and Development’s TP guidelines; • The controlled transactions covered by the proposed APA have already been entered into and are unlikely to change significantly in the period covered; • A proposed arrangement is under 39
serious contemplation and the proposed actual provisions are unlikely to change significantly in the period covered; • The TP issues are complex and there is uncertainty as to how the TP rules apply; • Without an APA, the probability of double taxation is high.
Rollback When the signed APA provides a reasonable pricing basis for prior years’ TP issues, the pricing methodology in the APA can be applied to prior years (i.e. rollback). The Commissioner of Inland Revenue will consider requests for rollback in the case of bilateral and multilateral APAs. The commissioner will treat as a voluntary disclosure any amendment to prior years arising from rollback if certain conditions are satisfied and the relevant penalty may be reduced.
Renewal If a person having an APA concluded wishes to request for a renewal of the APA, the request must be submitted at least six months before the expiration of the APA. The renewal process can be streamlined if there are no material changes to the role of the Hong Kong entity(ies) within the global value chain and the controlled transactions over the course of the period of the renewed APA, and when there are no proposed changes to the existing terms.
Fees APA applicants bear the APA application fees, which include: a service charge based on actual hours spent by the IRD’s APA team with a cap of HK$500,000; the payment or reimbursement of the fees paid by the commissioner to an August 2020
independent expert; and other costs and expenses incurred. A deposit must be paid to the IRD prior to the formal application.
The takeaway In the context of the current international tax environment, an APA has become an increasingly useful tool for multinational enterprises (MNEs) to gain tax certainty. In view of a more rigorous TP regime in Hong Kong and heightened transparency of tax information, there are increasing cases of tax controversy. The current environment drives a stronger need for MNEs to adopt a proactive tax strategy to manage tax uncertainties. APAs can be particularly useful for taxpayers under the following situations: • For taxpayers already facing potential risks arising from TP arrangements in Hong Kong or other tax jurisdictions – they could avoid or reduce double taxation by entering into an APA with tax authority(ies); • For taxpayers who have already achieved settlement in a tax audit – since the IRD has already obtained thorough understanding of the facts and circumstances of the controlled transaction and the TP methodology should have been agreed, the APA process can be largely streamlined; • For taxpayers who have TP risks in prior years – the rollback of an APA can be an alternative to resolve TP disputes, enabling taxpayers and tax authority(ies) to resolve TP issues in a non-adversarial manner; • In respect of business restructuring that involves TP policy changes, tax certainty can be obtained through an APA; • Controlled transactions that are complicated and involve relatively high TP risks.
The revised DIPN 48 reflects the IRD’s commitment to develop the APA programme in Hong Kong in line with the broader international taxation developments. The previous five-stage process is replaced by a three-stage process, resulting in a new APA process that is more flexible, transparent and collaborative. The revised DIPN 48 includes indicators of “more likely” or “less likely” cases to enter into an APA, providing clear guidelines for taxpayers to assess their applications. In addition, the revised DIPN 48 clarifies the expectation and considerations of the IRD on APA applications, which facilitates taxpayers to evaluate the feasibility of a potential APA before initiating applications. The involvement of the IRD to establish and agree on an initial case plan with taxpayers at the early stage, as well as setting out the expected timeframe for the early engagement stage and the APA application stage (i.e. six months and 18 months respectively) are conducive to both parties effectively managing the application process. Substantial information disclosure requirements and technical discussions throughout the APA process may present challenges to potential applicants. It is therefore recommended to carefully plan ahead the adequate resources and seek professional advice when appropriate. This way, applicants can fully optimize This article is the opportunity and contributed by improve efficiency and chance of Cecilia Lee, success. Transfer Pricing Leader, Wengee Poon, Transfer Pricing Partner, and Tiffany Wu, Transfer Pricing Partner at PwC Hong Kong 40
Proposed tax concession for carried interest
A summary of the Institute’s submission in response to the FSTB consultation The Hong Kong Institute of CPAs issued a submission to the Financial Services and the Treasury Bureau (FSTB) on a proposal to provide a tax concession on carried interest. While the Institute is supportive of the general direction to offer a tax concession, the submission raises certain technical issues and points for clarification.
Eligible funds
The Institute calls for clarification if the requirements for profits tax exemption under sections 20AN and 20AO of the Inland Revenue Ordinance is a prerequisite for enjoying the preferential treatment for carried interest.
What is carried interest?
The proposal makes reference to the definition of “carried interest” in the United Kingdom with suitable modifications. Following the U.K.’s approach, carried interest means a sum which is received or accrued to the persons concerned by way of profit-related return. It is proposed that the “profit-related return” is defined to encompass three conditions: (i) the carried interest must arise only if the validated fund is making profits, (ii) the carried interest paid would vary substantially by reference to the profits; and (iii) return to external investors is also determined by reference to the same profits. It appears that these conditions could be problematic for carried interest paid under the United States model (i.e. on a deal-by-deal basis). Therefore, the Institute recommends a wider definition of “carried interest.”
Is carried interest capital or revenue in nature?
If the holding period is long enough, carried interest in part or in full could be regarded as capital in nature in both the U.K. and U.S. Hence, lower tax rates for capital gains may apply. However, carried interest recipients in Hong Kong would be subject to profits tax or salaries tax based on the entire amount received as no part of it would be considered as capital in nature. As capital gains are not taxable for profits tax, the preferential regime could be even more attractive if the government would agree to treating the carried September 2020
interest as capital in nature by reference to the holding period.
Qualifying transactions
The Institute recommends that what constitute “qualifying transactions” should be clearly explained in the legislation.
Qualified carried interest recipients
The FSTB proposed that individuals providing investment management services to eligible funds in Hong Kong who derive assessable income from the employment with the qualifying person could enjoy the concessionary tax rate. However, other employees, such as the chief financial officer, legal counsel, head of investor relations, could also be the carried interest recipients. Moreover, some investment advisors may need to travel overseas to handle projects. Therefore, the government may consider expanding the scope of the qualified carried interest recipients.
Tax loss
The FSTB proposed that tax loss of the carried interest recipient would not be eligible for carry forward. However, if the highly competitive rate is not set at zero, it is necessary to allow tax loss be carried forward to offset against future taxable profits.
Tax rate differential
The management fee and carried interest payable to the investment manager will be subject to profits tax at normal tax rates and the concessionary rate respectively. Hence, there is a tax differential. While it is common for management fees to be set at 2 percent of the fund’s assets under management, the Inland Revenue Department (IRD) expects that fees are charged at an arm’s length basis. To this end, would the IRD agree 2 percent as the deemed arm’s length amount? Clear guidance on what would be considered as an acceptable arm’s length basis would avoid unnecessary disputes.
Concessionary tax rate
Setting the concessionary tax rate at zero would make the preferential tax regime very attractive. However, there is a minimum tax rate requirement under the Base Erosion and Profit Shifting 2.0 initiative. Though most investment
managers would not hit the €750 million threshold, consideration should still be given to avoid potential tax leakage in rare cases.
Substantial activity requirements
The substantial activity requirements of (i) hiring of at least two investment professionals and (ii) a minimum of HK$3 million local spending are friendly to the investment managers. Yet, the government should ensure that this preferential tax regime would not be considered as a harmful tax practice by the Organization for Economic Cooperation and Development.
Accounting standards
Many existing funds use Cayman structures and prepare their accounts under U.S. Generally Accepted Accounting Principles (GAAP). Yet, the IRD only accepts accounts prepared under Hong Kong Financial Reporting Standards. GAAP conversion is time consuming and cumbersome. How can this be streamlined?
Timing difference on recognition
Expense and income recognition in the hands of the fund and the investment manager are governed by two sets of accounting standards. Timing difference for the two parties may occur. The Institute calls for clarification on the acceptable tax treatments on the amounts recognized in the two parties’ accounts.
The role of auditors
Under the FSTB’s proposal, auditors have a role to play to report that the carried interest payers are validated funds and the carried interest recipients satisfy the substantial activity requirements. This article is However, it contributed by is unclear to William Chan, us what the Chairman of the exact reporting Institute’s Taxation requirements Faculty Executive are, e.g. level of Committee and Partner, assurance and Grant Thornton, and therefore the Eric Chiang, Deputy Institute sought Director, Advocacy and clarification on Practice Development the same. at the Institute 41
RULES ARE CHANGING: With the overhaul of international tax rules, including the BEPS 2.0 initiative, and tax treaty negotiations slowed down due to COVID-19, panellists at this year’s Annual Taxation Conference discussed how Hong Kong should take on the challenges and prepare for what comes next. Eric Chiang and Paul Smith report Photography by Calvin Sit
T
hanks to this social distancing world, the Hong Kong Institute of CPAs’ Annual Taxation Conference looked a little different this year. One of the highlights of the year for the Institute, the affair is usually well-attended, with lively discussions mixed in with presentations and members networking at break-out sessions. This year’s conference was well “attended,” albeit virtually, and without some of the personal connections. Nevertheless, the panellists still entertained and informed the virtual attendees with their knowledge and insights into the challenges facing Hong Kong due CONFERENCE to the changing international tax landscape SPEAKERS: and COVID-19 – the topic of the first panel (From left) discussion.
BRIAN CHIU Deputy Commissioner (Technical), Inland Revenue Department
WILLIAM CHAN Partner, Grant Thornton Tax Services and Chair, Institute’s Taxation Faculty Executive Committee MICHAEL OLESNICKY Senior Consultant, Tax, Baker McKenzie
September 2020
European investigation
Moderator Jo-An Yee, Partner, EY and a member of the Institute’s Taxation Faculty Executive Committee (TFEC), began the discussion by asking Jonathan Culver, Tax Partner, Deloitte China, about why the European Union is looking at territorial regimes and the focus of its reviews. Hong Kong is on the list of jurisdictions that will be subject to review. He noted that the E.U.’s Code of Conduct Group (COCG) was established as a unified body to represent the wishes of all member states. “Taxpayers may be able to negotiate a more favourable outcome for their tax planning with a single member state, or simply move between member states, but this is harder when the group acts through one body representing all member 42
WILL HONG KONG STAY COMPETITIVE?
September 2020
43
states,” he said. Regarding the review, Culver commented that the primary objective was to check whether territorial regimes constitute harmful tax practices focusing on two aspects, passive income and active income associated with permanent establishments (PE). “Passive income is important because it is possible for it to be allocated to a legal entity with not much substance. Income is effectively paid from one jurisdiction to another. Is that income actually going to be taxed?” he noted. As for active income for PE, revenues are normally attributed based on internal allocation rules. “Hong Kong has a best-in-class PE definition, which provides some comfort, however, because income attributed to a PE can still be offshore sourced, it will be interesting to see what the COCG concludes,” he said.
Hong Kong’s response
Yee asked Brian Chiu, Deputy Commissioner (Technical), Inland Revenue Department, three questions about the E.U. review. “Firstly, what are the major challenges to Hong Kong? September 2020
Secondly, how can Hong Kong defend itself during the review? Finally, what will we change in the tax legislation after the review?” “We have corresponded with the COCG and we are still waiting for the response. We will study the details and may consult stakeholders before we take any steps,” Chiu responded. Regarding whether income is taxed, he commented that for passive income, “if there is no nexus between a tax jurisdiction and an income then theoretically the tax jurisdiction has no right to tax or not to tax the income. Hence, double non-taxation may arise if the income is booked in a tax jurisdiction with which the income has no nexus.” For active income, the definition used for PEs is a key issue. “For example, if a PO box could be regarded as a PE, companies may allocate huge revenue to the PE. If the allocated revenue is not taxed or lowly taxed, this would concern the E.U.,” Chiu said. Chiu finished by agreeing with Culver’s assessment of Hong Kong’s PE definition. “We will undertake FAR analysis to review the
CONFERENCE SPEAKERS: (Back, from left) JONATHAN CULVER Tax Partner, Deloitte China JO-AN YEE Partner, EY and a member of the Institute’s Taxation Faculty Executive Committee (TFEC) (Front, from left) GWENDA HO Tax Partner, PwC Hong Kong and a member of TFEC PATRICK CHEUNG Partner, Global Transfer Pricing Services, KPMG 44
taxation rights over multinational corporations (MNCs) to locations where users or consumers reside. Pillar Two ensures a minimum level of taxation for MNCs, called the Global Anti-Base Erosion (GloBE) proposal. Although COVID-19 has delayed international agreement around the initiative, the OECD is targeting a consensus-based agreement by the end of 2020. In June, the Hong Kong government set up its own advisory panel on the initiative, which will review the possible impact of BEPS 2.0 on the competitiveness of Hong Kong’s business environment, and advise the financial secretary on strategies and measures to facilitate the sustainable development of Hong Kong as an international financial, trading and business centre. Yee began with Pillar Two, asking Patrick Cheung, Partner, Global Transfer Pricing Services, KPMG, “What are the key design features of the GloBE proposal?” Cheung gave the example of a typical British Virgin Island (BVI) incorporated company. The BVI company is interposed between two operating companies in different jurisdictions, and some profit is booked to this BVI company, which is not taxed. “Under the GloBE proposal, this untaxed profit booked in the BVI company will be taxed somewhere, it could be at the parent company level or the payer level by means of denial of expense deduction claim,” he said. This would be similar to the approach taken through controlled foreign corporations rules or the United States’ Global Intangible LowTaxed Income (GILTI) rules, which reduce the incentive for MNCs to The BEPS 2.0 pillars shift profits into low- or zero-tax The Organization for Economic jurisdictions. Cooperation and Development Given that the proposals are new (OECD) began its Base Erosion and ideas to the existing international tax Profit Shifting (BEPS) 2.0 in 2019 ecosystem, changes to the existing to address the tax challenges linked international tax protocol is required to the digitalization of the economy. The proposals have two pillars. Pillar for successful implementation of the BEPS 2.0 proposals. “To One covers the profit allocation successfully implement GloBE, and new taxing rights in market we need to have structural changes jurisdictions, which will grant function, asset and risk of the PE to judge if the revenue allocated to it is reasonable. Therefore, I don’t think this would be a concern for both the E.U. and us as Hong Kong transfer pricing rules are up to the international standard.” Michael Olesnicky, Senior Consultant, Tax, Baker McKenzie, agreed that it was premature to conclude now what impact the E.U. review will bring to the Hong Kong tax system. He noted that the E.U. set out that an overly broad definition of income excluded from tax could be a concern. “We will need to clarify if this would only apply to specific categories of income, or if it is applicable to the Hong Kong territorial regime more generally,” he noted. For active income, Olesnicky noted that Hong Kong’s territorial source regime may lead to nontaxation. “While we can ensure that the amount allocated to the Hong Kong PE is appropriate by using FAR analysis, part of the profit could still be offshore in nature and not subject to Hong Kong tax.” This may allow taxpayers to secure offshore claims if they have limited operations in Hong Kong. “The E.U. expects to see substance. The two sets of testing parameters seem to be going to two extremes,” he said. Culver agreed, suggesting that the E.U.’s substance requirement and how Hong Kong exempts offshore income could be a problem. “We should keep an eye on how the E.U. would view the headquarters function in Hong Kong, particularly where there are a lot of fund flows through Hong Kong entities.”
September 2020
to tax treaties, agree on the loss blending method, harmonize different points of views, and get buy-in from the U.S.,” he said. Gwenda Ho, Tax Partner, PwC Hong Kong and a member of TFEC, explained that GloBE features four component rules. Firstly, the income inclusion rule, applies a top-up tax to income taxed below a specified minimum rate. Secondly, the switch-over rule, permits in certain instances taxation of otherwise exempt profits when such profits are taxed below the minimum rate. Thirdly, the undertaxed payments rule, denies deductions for related-party payments taxed below the minimum rate. Finally, the subject-to-tax rule, subjects both related- and unrelated-party payments taxed below the minimum rate to withholding and denies treaty benefits thereon. Yee then asked the panel to share their experience of other countries’ preparations for BEPS 2.0. “Everyone is doing consultations now, it seems that the delay to the initiative may not be bad,” said Cheung. He noted that Singapore was working to prepare for BEPS 2.0 as it had a lot of tax incentives to attract foreign investment. Olesnicky asked Chiu about Hong Kong’s discussions with other countries. “Singapore, Malaysia and a few more countries share common interests, will we work with them together and develop coordinated responses to the OECD?” While international cooperation is a good idea, Chiu urged caution. “It takes two to tango, and we need to be very careful about cooperation arrangements with other countries. Cooperation is always possible if it is in our interests,” he replied.
Disruption to the initiative
The U.S. had recently paused its BEPS 2.0 Pillar One discussions due to a need to prioritize their resources on the COVID-19 pandemic. “What is the impact of this action?” Yee asked the panel. “The situation is not ideal, and
“It takes two to tango, and we need to be very careful about cooperation arrangements with other countries. Cooperation is always possible if it is in our interests.”
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ROUNDTABLE International tax
“Education and consultation are important. Taxpayers should know that BEPS 2.0 is not just about increasing tax revenues for governments, but is also to ensure a level playing field between jurisdictions.”
September 2020
without the U.S.’s involvement there could be delays in coming to a common consensus. Individual countries are more likely to take unilateral measures such as introducing a digital services tax (DST) to collect tax revenues from digital transactions,” Ho noted. “The U.S. is strongly opposed to the introduction of DST and has called for commensurate measures, for instance, threatening to impose a 25 percent tariff on US$1.3 billion of French goods if France begins collecting DST from U.S. companies next year,” she continued. The two pillars had different backers Cheung said. “The Europeans want Pillar One, but the U.S. wants Pillar Two. COVID-19 provides the perfect excuse to kick the can down the road,” he said. “Yet the dynamics have not changed. Taxpayers will get caught in between and suffer if there is no agreement. The U.S. is of the view that the problems can be resolved through the BEPS 1.0 action plan. This thinking is not entirely wrong,” he remarked. Pillar One’s turnover threshold of €750 million is so high that most MNCs caught by it would largely be U.S. tech companies, highlighted Olesnicky. “Clearly Pillar One is not in their favour. Agricultural and financial services, two industries that the Europeans want to protect, are carved out of the initiative,” he said. “It therefore appears that the Pillar One design is very Europecentric, and may be viewed, to an extreme, as a European attack on the U.S.” A unilateral approach has been taken by the U.S. said Chiu. “It applies its own rules like Foreign Account Tax Compliance Act, GILTI and Base Erosion and Anti-Abuse Tax,” he said. “Tax jurisdictions that would like to enter a tax treaty with the U.S. has to accept the U.S. model rather than the United Nations or OECD model.” The U.S. introduced new components to its tax regime from time to time, but it is questionable as to whether these measures are acceptable at the international level. Olesnicky warned about two potential outcomes if the U.S. completely withdrew from the BEPS 2.0 discussions. “Either it’s the death of BEPS 2.0, or the OECD still goes ahead with it. It is always better to have a true global solution,” he said. The upcoming U.S. election may also complicate matters, said Culver. “While it is not easy to implement Pillar One, this could become part of the political agenda in the
upcoming U.S. presidential election.”
Helping Hong Kong
Noting that there was still much to be resolved, Yee asked the panel to share their ideas about how policymakers in Hong Kong can be prepared for the introduction of BEPS 2.0. “Education and consultation are important. Taxpayers should know that BEPS 2.0 is not just about increasing tax revenues for governments, but is also to ensure a level playing field between jurisdictions,” said Ho. “While certain businesses may be concerned about the potential changes, they may wish to appreciate that some of these changes may help increase their competitiveness against their overseas counterparts.” Ho finished by saying that concluding more tax treaties with major trading partners and allowing unilateral double tax relief measures would be important to address potential double or multiple taxes, thereby making the Hong Kong tax system more competitive. For Cheung, clarity and certainty in the tax system are important. “Investors may be reluctant to come and invest in CONFERENCE Hong Kong if we lack clarity and certainty,” he said. SPEAKERS: Efforts to avoid double (From left) taxation were important LORRAINE CHEUNG according to Chiu. “The design Partner, China Tax and of Pillar Two is really a zero Business Advisory Services, sum game so double taxation EY and a member of the is unlikely. While for Pillar Institute’s China Tax One, there is a chance of double taxation, and the impact should Sub-Committee not be ignored,” he said. Yee then asked Chiu, “What ALICE LEUNG has the government done in the Partner, Corporate Tax tax legislation to prepare for Advisory, KPMG China BEPS 2.0?” Chiu highlighted the recently passed ship leasing CECILIA LEE bill. “We intentionally added Partner, Tax Services, some provisions there to make Transfer Pricing Services, it easy to change the legislation PwC and a member of the if the minimum tax rate is Institute’s China Tax implemented under the BEPS Sub-Committee 2.0 bill, if any,” he said. BEPS 1.0 and 2.0 SARAH CHAN significantly changed Hong Partner, Tax and Business Kong’s tax system, according to Olesnicky. “When we Advisory Services, Deloitte make changes to our tax China and Deputy Chair, system to make it fit to the Institute’s Taxation Faculty international game rules, we Executive Committee 46
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need to keep up with the OECD’s recommendations,” he said.
Increasing its tax take?
The final question Yee asked the panel was whether BEPS 2.0 would lead to more revenue for Hong Kong, noting that the territory was facing a budget deficit. For Olesnicky, the deficit represented a good time to review the fundamentals of the system. “Shall we keep the source rule in our tax system? What about the possibility of introducing new taxes like a goods and services tax or capital gains tax?” he asked. “Maybe we should do a systematic rather than a piecemeal review,” he concluded. Culver agreed, saying that September 2020
BEPS 2.0 would bring big changes to Hong Kong. “It is sensible to conduct a holistic review of the tax system, and ensure that with the implementation of new changes, Hong Kong could be a more attractive place for foreign investors,” he said. There may even be a win-win for Hong Kong. Ho suggested that if Hong Kong can grasp the taxing right, it may be able to collect some extra global tax revenue, while taxpayers should prefer paying a lower tax rate in Hong Kong than a higher rate in another jurisdiction. Chiu said that while the tax treaty negotiations have slowed down due to COVID-19, Hong Kong remains committed entering into more tax
treaties. “We work to maintain Hong Kong’s status as an international financial hub and enable it to keep on prospering,” he said. Olesnicky suggested maintaining the source rules, and implementing the minimum BEPS 2.0 rules when finalized. “We just need to take defensive measures to tax those revenues affected by the implementation of BEPS 2.0,” he suggested. Concluding the panel, Chiu said that the IRD had heard about this proposal but had to ensure that it was acceptable for both the OECD and Hong Kong – a reminder that international agreements require communication and continued engagement.
The full conference is available as an e-Seminar now, featuring presentations on changes in the tax landscape and Board of Review cases and the two panel discussions.
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Upfront lump sum spectrum utilization fees held as capital in nature and not deductible Examining the Court of First Instance judgment The Court of First Instance (CFI) handed down its judgment in China Mobile Hong Kong Company Limited v. Commissioner of Inland Revenue (CIR) in July. The key issue in this case is whether the upfront lump sum spectrum utilization fees (upfront SUFs) paid by the taxpayer to the Telecommunications Authority (TA) were capital in nature and not deductible. The CFI dismissed the taxpayer’s appeal and upheld the Board of Review’s (board) decision that the upfront SUFs were capital in nature and not deductible. This article summarizes the relevant facts of the case, highlights the key findings of the CFI and discusses our comments on the industry-wide “black hole expenditures” issue.
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Background of the case Below is a summary of the key facts of the case: • The taxpayer is a mobile telecommunications and related services provider in Hong Kong. Since 1996, the taxpayer has paid annual spectrum utilization fees (annual SUFs) to the government for the use of 2nd Generation (2G) frequency bands assigned to it for its operations. • In 2007, the TA recommended to the government that the future 4th Generation (4G) spectra would be allocated by auction and the SUF would be in the form of an upfront lump sum payment. The auction of 4G spectra was completed early 2009 and the taxpayer was the successful bidder of one of the frequency bands. The taxpayer paid a one-off lump sum SUF in the amount of HK$494.7 million in March 2009. • In 2008, the TA proposed to the government to make certain unallocated 2G frequency bands September 2020
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available to the existing 2G licensees by auction. In addition to the annual SUFs, a successful bidder was required to pay a one-off lump sum SUF. The taxpayer was the successful bidder of two frequency bands in the auction held in June 2009 and made total lump sum payments of HK$15.1 million. In its audited financial statements, the taxpayer classified the upfront SUFs as non-current intangible assets and amortized them on a straight-line basis over the relevant licence periods. The taxpayer sought to deduct the annual SUFs and amortization of the upfront SUFs in its profits tax computations for years of assessment 2009/10 to 2011/12. The assessor raised assessments for these years of assessment in accordance with the returns. Subsequently, the assessor raised additional assessments disallowing the deduction of the amortization of the upfront SUFs on the basis that such fees were capital in nature. These assessments were confirmed by the determination of the Deputy CIR. The taxpayer appealed against the assessments to the board, which dismissed the appeal and held that the upfront SUFs were capital in nature and not deductible. The taxpayer then lodged an appeal against the board’s decision to the CFI.
The CFI’s judgment In the appeal before the CFI, the taxpayer sought to draw a distinction between (1) a payment for the “right to use” radio spectrum (which is capital in nature) and (2) a payment for the “use of” such spectrum (which is revenue in nature). The taxpayer’s key argument, based on the various provisions of the
Telecommunications Ordinance (TO), was that the upfront SUFs were paid for the use of, as opposed to the right to use, the 2G and 4G frequency bands and therefore were revenue in nature and deductible. The CFI dismissed the taxpayer’s appeal and upheld the board’s decision that the upfront SUFs were capital in nature and non-deductible. Below is a summary of the CFI’s analyses in its judgment. “Right to use” vs. “actual use of” the radio spectrum • It is not necessary in every case to draw a distinction between a payment for the “right to use” and a payment for the “use of” an asset for the purpose of determining whether the payment is capital or revenue. It is, in the judge’s view, wrong in principle to treat such distinction as being decisive of determining the nature of a payment. • Upon a consideration of the legislative regime under the TO and looking at the matter from a practical, business and common sense point of view, there is no reason to believe that the legislature had the above distinction in mind. There is nothing in the TO suggesting that the obligation to pay the upfront SUFs would only arise upon actual use of the assigned spectrum. • The upfront SUFs were the considerations which the taxpayer had to pay in order to be able to use (i.e. for the right to use) the designated spectrum. They were payable by the taxpayer regardless of whether it actually used, or made use of, the spectrum, and regardless of the extent of its use of the spectrum. • The notices of terms and conditions issued by the TA relating to the 2G and 4G auctions specified the “right to use” the specified frequency bands. 48
Capital vs. revenue expenditure • There are well-established principles for determining whether an expenditure is capital or revenue in nature. As a question of law, there is no single decisive test and the issue has to be approached by applying common sense from a practical and business point of view having regard to all relevant features of the case. Some useful indicia can nevertheless assist in answering the question, namely whether the expenditure (1) is incurred “once and for all” or is “recurring”, (2) is incurred with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade and (3) relates to the costs of creating, acquiring or enlarging the permanent income-producing structure as opposed to performing the income-earning operations. • The 4G spectrum and the additional 2G spectrum acquired by the taxpayer were part of the necessary and permanent profit-earning structures required by it to venture into a new line of business (i.e. the provision of 4G services) or expand and strengthen its existing line of business (i.e. the provision of 2G services). • The upfront SUFs would bring about enduring benefits to the taxpayer’s business as the taxpayer could provide 4G and additional/enhanced 2G services to its customers for the next 15/12 years respectively. • The upfront SUFs were lump sum payments incurred once and for all, instead of periodic payments to meet an ongoing demand for expenditure. • The change in the method of fixing and payment of the SUFs from an annual royalty basis to an upfront lump sum basis was driven by economic, business and administrative considerations. The motive or purpose of the recipient (i.e. the TA) in the method of payment is irrelevant in deciding whether the payment is capital September 2020
or revenue in nature as far as the profits tax position of the payer is concerned. The correct question is what the expenditure is calculated to effect from the payer’s practical and business point of view. • There are significant differences between the annual SUFs and the upfront SUFs. In particular, the annual SUFs were made annually and calculated by reference to the network turnover of the taxpayer subject to a minimum amount. These are the relevant factors which support the view that the annual SUFs were revenue in nature (a view that the CFI assumed, without deciding, was correct).
The takeaway The CFI’s analyses on the nature of the upfront SUFs, based on the agreed facts, are in line with the legal principles established by the judicial precedents in determining whether an expenditure is capital or revenue in nature. It may be worth noting that the judge made a comment in their judgment that a distinction between the “right to use” and the “use of” an asset is not decisive, or even not necessary, in determining the nature of a payment. Arguably, an upfront lump sum payment made to secure the right to use an asset for the next 10 years is different in nature from an upfront lump sum that represents payment made in advance for the annual use of the asset for the next 10 years. Since this distinction formed the crucial argument of the taxpayer, it has yet to be seen whether the taxpayer will further appeal the case to a higher court. Certain expenditures incurred by telecommunication service providers for acquiring an intangible, such as the upfront SUFs in this case and the payments for acquiring an indefeasible right of use (IRU) of certain capacity of a submarine/optical fibre cable, have been a controversial
issue from a business perspective. As decided by the CFI in this case, the upfront SUFs are not tax deductible despite these expenditures were necessarily incurred by the taxpayer in producing its chargeable profits in Hong Kong. These so-called “black hole expenditures” may also exist in other industries such as the catering and retail industries where a lump sum may be incurred to acquire a licence or franchise for running a business. The non-deductibility of "black hole expenditures” is an industry-wide issue and will hinder the development of Hong Kong as a world-class telecommunication services centre. Therefore, the government should consider expanding the existing scope of tax deduction for capital expenditures incurred for acquiring intangible properties to cover not only patents, trademarks and copyrights, etc. but also other intangibles such as spectra and IRUs as far as they are used in producing profits chargeable to tax in Hong Kong. Similar to granting depreciation allowances to investment in plant and machinery or allowing one-off deduction for computer software under section 16G of the Inland Revenue Ordinance, providing tax deduction to this type of capital expenditures will encourage investments in the relevant business sectors, such as the telecommunication industry.
This article is contributed by Gwenda Ho, Partner, Fergus Wong, Director, and Anita Tsang, Director, Tax Services, of PwC 49
MOVING ON UP October 2020
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Curtis Ng, Regional Tax Partnerin-Charge, Northern Region, at KPMG China, spends a lot of time encouraging the next generation of tax professionals to take a broader perspective and be future-ready. He talks to Nicky Burridge from his Beijing office about his long tax career and the resilience of the Mainland China market
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Photography by Stefen Chow
elocating to Beijing in the early stages of a global pandemic would be seen as a challenge by many, but Curtis Ng was undaunted. “When I first arrived, there were no people on the streets. I remember going to the centre of Beijing and all the shops were closed,” says Ng, Regional Tax Partner-in-Charge, Northern Region, at KPMG China. He was only approached about taking on the role the week before Chinese New Year. Two weeks later, he was in Beijing. He explains that moving to the city was a big decision, as he had always worked in Hong Kong and, while he was excited about the possibility of relocating, he did not want to disrupt his three children in the middle of the school term. “Luckily, I had the support of my wife and, within 24 hours, we had agreed that I would go,” he says, adding that they decided his wife and two sons, aged seven and 13, would join him in August, when his daughter, 18, headed to the United Kingdom for university. Unsurprisingly, many people considered it to be a bad time to relocate, but not Ng. “I always take a very positive view. If I had come to Beijing during a normal business period, I may not have had the luxury of being in the office without any interruptions. Because I was in the office by myself, I was able to really focus on what changes to make to the practice. It was good timing from that perspective,” he says. With his wife and children still in Hong Kong, he was also free from distractions when he went home in the evening. “It made the transition much easier as I could catch up quickly. I could do in two months what would normally take me six months,” he says.
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A lot to learn
Ng started working at KPMG 25 years ago, joining the firm after he graduated from the Chinese University of Hong Kong with a bachelor’s degree, majoring in economics. He admits that at the time, he knew very little about the accounting profession. When offered a career path in either tax or auditing, he decided to do tax despite knowing next to nothing about it. He set about obtaining his professional qualification, which under the old system meant taking 14 different exam papers, although Ng was exempted from one of these. “It was a relatively long process, but I got there within three years,” he remembers. Even once he had qualified, there was still a lot he had to learn. “I not only had to know the tax legislation, but I also had to look at court case judgments in Hong Kong and other jurisdictions. It was tough but I enjoyed it.” Ng worked his way up through the ranks of KPMG, becoming a partner within 11 years. Before moving to Beijing, Ng was regional tax partner-in-charge of Hong Kong, managing the firm’s tax practice in the region, as well as continuing with client work and participating in various professional bodies, including being deputy chairman of the Institute’s Taxation Faculty Executive Committee. In fact, he says one of his few regrets of taking up the Beijing post was that he was not able to become chairman of the committee this year.
Responding to the next generation
One of the changes Ng introduced during his time as partner-in-charge in Hong Kong was setting up the Broader Perspective Programme for new joiners to the tax practice. He explains that the tax department had grown considerably since he first joined it, and there were now many different areas in which graduates could specialize, such as corporate tax, transfer pricing, tax disputes and merger and acquisition tax. The October 2020
programme enables graduates to spend their first three years at the firm rotating between different teams in the tax department to gain experience of the different areas before making a decision on which area to specialize in. “It is a matching process. On the one hand, the different teams can choose who is a good fit for them. At the same time, it gives young people the chance to choose which specialized area they would like to focus on.” Another change introduced by Ng was creating an outsourcing centre for the tax department, not only to reduce costs but also to enable tax practitioners to focus on the more interesting aspects of their roles. “The younger generation has different expectations. They want to have job satisfaction and they believe they have the ability to do more complicated or higher value work,” he explains. “As a result, we tried to move the routine work away from them to the outsourcing centre, enabling them to focus on technical skills and have more opportunities to work with clients.” While Ng initially had to reassure colleagues that setting up the outsourcing centre did not mean jobs were being taken away from Hong Kong, he says the move has been successful and led to an increase in retention rates and engagement among younger people.
“Tax is only one of the factors clients will ask you about. They will also have questions from a business angle. When we give advice, we have to consider it from a much wider perspective than just tax.” 52
Curtis Ng joined KPMG 25 years ago after he graduated from the Chinese University of Hong Kong with a bachelor’s degree, majoring in economics. He moved to Beijing earlier this year.
Embracing change
Ng thinks being a tax practitioner has changed significantly since he first started his career, but that does not mean things are now easier for younger members of the profession. He points out that while practitioners no longer have to wade through 40-page court judgments in order to come up with their own interpretation of a ruling – as they can simply look it up online – they still need to ensure they fully understand it. “I always encourage the younger generation to still spend some time doing their homework to make sure they really know what they are doing,” he says. October 2020
He also encourages them to develop a wider business knowledge. “Tax is only one of the factors clients will ask you about. They will also have questions from a business angle. When we give advice, we have to consider it from a much wider perspective than just tax.” Soft skills, such as being a good communicator and listener, are also increasingly important. “Because of the more complex business environment, you have to listen carefully to understand what the real issue is for a client and what impact it could have on their operations. When you give advice, it will not just be written. The client
will also want you to explain why you have come to this conclusion.” He adds that in the current tax environment, in which new laws and guidance are frequently issued and interpretations change, it is not always possible to be completely certain. “It is very important for the tax professional to explain clearly to the client what the possible outcomes and risks are, and how to mitigate those risks.” He also advises young people to “think big” and come up with new ideas. “You may be wrong most of the time, but without thinking, you will not find a better way of serving your clients.” At the same 53
time, he tells them to be bold and “In Hong Kong, we have embrace change, seeing it as an opportunity, rather than a challenge. had various changes “Don’t be afraid of change, take it to tax law to focus on as a positive. If you always think it will affect you negatively, you will various focused sectors, go nowhere. Instead, see it as an whether these are opportunity,” he says. He adds that there are always opportunities for young people who user-friendly is still proactively look for them. questionable. I believe
A resilient economy
Ng thinks Mainland China is one of these opportunities. Despite the short-term disruption caused by the pandemic, he expects the Mainland’s economy to remain resilient over the medium to longterm. He points out that in most places in the Mainland, it is now “business as usual,” while high-end malls in locations such as Shanghai are actually benefitting from people being unable to travel abroad, as more money is being spent at home. “Consumers in China are still spending. There is still a very strong engine behind China’s economy. There will always be ups and downs and challenges, but over time, the growth will still be there,” he says. Even so, he does expect the pandemic to leave lasting changes on the way the economy operates. Firstly, he expects many things that were previously conducted faceto-face, from business meetings to education, to continue to be conducted online, even once travel returns to normal, as it is more efficient. He also expects online shopping and food delivery to continue to grow. “I believe this will be unstoppable – not only in China, but globally,” he says. Ng does not expect the pandemic to have a significant impact on tax policy, pointing out that most government measures to support the economy take the form of cash handouts, rather than tax measures. In Mainland China, he October 2020
we have to take a good look at it.”
highlights how open-minded the State Taxation Administration is, and its willingness to listen to professional and industry views on policy in order to promote a good environment for business. “There are still various challenges, but I can see the improvement and development of the economy.” Ng believes tax policy should focus on medium and long-term issues, rather than short-term ones, stressing that giving businesses tax certainty is important for medium and long-term growth. He adds that while tax can be used to drive policy changes, such as the introduction of the research and development tax concession in Hong Kong to encourage innovation, incentives are only effective if businesses actually use them. As a result, he says it is important that governments have a review mechanism to check that their tax policies are working as they intended, and to make changes if they are not. “In Hong Kong, we have had various changes to tax law to focus on various focused sectors, whether these are user-friendly is still questionable. I believe we have to take a good look at it,” he says. Globally, Ng believes international cooperation in areas such as tax avoidance, including base erosion and profit shifting (BEPS) 2.0, will have a
bigger impact on the tax profession. “If you look at BEPS 2.0, it could potentially have a financial impact on Hong Kong if it leads to less investment. The government has to consider the best way for Hong Kong to go forward.” Hong Kong introduced a number of preferential tax regimes in the past to attract foreign investments. Taxpayers who qualify for the preferential tax regimes would typically enjoy lower tax rates. Yet, there is a minimum tax requirement under the BEPS 2.0 proposal and the tax rates under the preferential tax regimes would likely be below the minimum. The Organization for Economic Cooperation and Development had issued a consultation paper in October laying out the blueprint of the BEPS 2.0 proposal and the details are yet to be finalized. Nonetheless, it is likely that the proposal would make preferential tax regimes less effective in attracting foreign investments.
Learning from golf
Ng says the most memorable thing about his career has been all the people he has met through his work, not only in the tax profession, but also in the firm and among his clients. “It is because I meet all of these people that I find myself having the chance to learn many new things. I like to learn, and I think it has enabled me to become a much better person, not only from a professional point of view but also as a human being,” he says. When he is not working, Ng likes to spend time with his family and play golf. “Golf is a good sport, but it is also a good way to learn from others and improve yourself.” He points out that golf made him realize that one bad shot does not matter, and if he continues to play, he can hit better shots and still get a good result.
In October, the Organization for Economic Cooperation and Development had issued a consultation paper laying out the blueprint of the base erosion and profit shifting 2.0 proposal. It is likely that the proposal would make Hong Kong’s preferential tax regimes less effective in attracting foreign investments.
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Before moving to Beijing, Ng was regional tax partner-in-charge of Hong Kong, managing the firm’s tax practice in the region. He was also deputy chairman of the Institute’s Taxation Faculty Executive Committee.
October 2020
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Views exchanged during the 2020 annual meeting with the IRD A look at the matters discussed at the Institute’s Taxation Faculty’s annual meeting with the Inland Revenue Department The Hong Kong Institute of CPAs’ Taxation Faculty’s annual meeting with the Inland Revenue Department (IRD) was held on 15 May. The discussions covered a wide range of tax topics and this article summarizes the views exchanged on the key questions. The full minutes can be found in Tax Bulletin 31 on the Institute’s website.
Corporate treasury centres Question: Under the current regime, qualifying corporate treasury centres (CTC) can enjoy 50 percent of the profits tax rate for income from qualifying treasury activities. Would an intra-group finance lease business be considered as a “qualifying corporate treasury activity” under the preferential tax regime? Answer: As the provision of finance leases for the purchase of plant and machinery is not an activity or a transaction specified in the definition of any one of the three types of activities mentioned in section 14C(1) of the Inland Revenue Ordinance (IRO) – the legislation for the CTC tax regime – a group finance lease business would not qualify for the CTC tax regime.
Tax deduction for lease payments Question: Based on our recent discussion with the IRD, the IRD would allow tax deduction on rental payment of a lease term under Hong Kong Financial Reporting Standard (HKFRS) 16 Leases based on the amounts charged to the profit and loss account. Is claiming tax deduction based on cash outflow/contractual commitment an acceptable alternative to the IRD? October 2020
Answer: • Tax deduction of expenses is governed by sections 16 and 17 of the IRO. HKFRS 16 should not have any effect on the total amount of cash flows reported. Therefore, adoption of HKFRS 16 would not affect the operation of sections 16 and 17 of the IRO. It is a matter of timing difference between the amount charged to the profit and loss account and contractual commitment. • In the example given, the deductible expenses would be the amounts charged to the profit and loss account in the respective years. • Tax adjustment on the opening balance of retained earnings on first adoption of HKFRS 16 should be done in the year of first adoption. • If the taxpayer opted for early adoption of HKFRS 16 and claimed tax deduction on the actual cash outflow basis, it is not necessary to re-open the prior year assessments, but provide a reconciliation schedule together with the current year tax return.
non-taxable items in the hands of the recipients for Mainland China individual income tax purposes. Are these subsidies taxable for Hong Kong salaries tax?
Note: Subsequent to the annual meeting, the IRD issued official guidelines on the profits tax treatment of leases where HKFRS 16 applies and confirmed that they also allow deductions based on contractual payments as long as such basis is consistently applied.
Answer: • The arrangement has to be examined in detail to find out if the non-Hong Kong employer provides rent-free accommodation to its employee through the unrelated client. • If the answer to the above question is yes, then the rental value of such accommodation has to be subject to salaries tax under sections 9(1)(b) and 9(2) of the IRO.
Greater Bay Area tax subsidy Question: The nine Mainland cities of the Greater Bay Area currently provide tax subsidies to qualified foreign high-end talents and talents in short who work in these cities. These subsidies are currently
Answer: The subsidies, whether or not in the nature of income from employment, should be wholly attributable to the taxpayers’ services in the Mainland. Therefore, it is likely that the tax subsidies would not fall within the charge to salaries tax under section 8(1A)(a) of the IRO.
Tax treatment of housing benefits provided by a third party Question: If a non-Hong Kong employer assigns its foreign employee to work in an office of an unrelated third party client in Hong Kong, the client would provide rent-free accommodation to the foreign employee during the assignment period. Will the rent-free accommodation be deemed as income (i.e. rental value) for salaries tax purpose?
Royalty payments to overseas non-resident Question: Where a Hong Kong taxpayer paid 56
royalties to an overseas related party, are these transactions required to comply with the arm’s length principle? Or can these transactions be regarded as specified domestic transactions? Consider the two cases detailed in section 21A of the IRO. In the first case 100 percent of the royalty income of the overseas related party are deemed as taxable receipt where the intellectual property (IP) was once owned by a Hong Kong taxpayer. In the second case, 30 percent of the royalty income of the overseas related party are deemed as taxable receipt as the IP had never been owned by a Hong Kong taxpayer. Answer: • The overseas recipient that fell within the deeming provision for royalties of section 15(1) was not regarded as having carried on a business in Hong Kong for the purpose of the transfer pricing provision in section 50AAJ(3). Therefore the domestic nature condition was not met and it is not necessary to further consider whether the no actual tax difference condition was met in both scenarios. • The transfer pricing provision in section 50AAF is applicable to both cases and income or loss in relation to the royalty transaction should be computed on an arm’s length basis. • The Hong Kong associate royalty payer is also required to include the transaction in its local file under the transfer pricing documentation provision section 58C(2).
Double tax relief for withholding tax on royalty income Question: Suppose a Hong Kong licensor enters into an annual licensing agreement with an October 2020
overseas licensee with royalties for 10 years. The licensor recognizes all royalties in year one according to HKFRS 15 Revenue from Contracts with Customers. Currently, tax credit can only be claimed before the end of six years after the end of the relevant year of assessment provided that withholding tax has been paid overseas. How can the licensor claim double tax relief for years seven to 10 in Hong Kong? Answer: Where a claim for tax credit could not be made within the timeframe specified in the legislation, the taxpayer might present a case for mutual agreement procedures (MAP) under the relevant comprehensive double taxation agreement (CDTA). Any MAP solution reached should be given effect despite any provision in the IRO.
Refunds to non-residents Question: Where a non-resident person was assessed for certain receipts (e.g. royalties) in the name of the payer in Hong Kong and paid excessive tax, refund cheques of “Non-Resident Profits Tax Returns” filings would normally be issued under the name of “HK Co for non-resident Co” which could not be banked. The cumbersome administrative procedures of requesting the reissuance of a cheque to a designated payee create hardship to the non-resident person in getting the refund. Could the IRD simplify the process for reissuance of refund check in the name of the non-resident? Answer: • To simplify the refund process, the IRD plans to upload a template letter of indemnity onto its website. Upon receipt of the refund notice from the
IRD, either the payer in Hong Kong or the non-resident person could download the template for completion. • The duly completed letter of indemnity, the refund cheque, together with a proper written request for amendment of payee’s name should be sent to the IRD for processing.
Certificate of Residence for offshore economic substance law purpose Question: Under the economic substance (ES) laws of offshore jurisdictions, entities that are tax residents in other jurisdictions are not subject to their ES requirements. A Certificate of Residence (CoR) would be a strong proof to these jurisdictions in accepting a taxpayer’s tax residence in Hong Kong. However, under the current IRD’s practice, CoR applications for purposes other than claiming tax benefits under tax treaties would not be entertained. Would the IRD consider issuing a special class of CoR or other documentation proof for serving the offshore ES law purpose or other non-treaty purpose? Answer: • It would be against international practice for the Hong Kong competent authority to issue a CoR, in the absence of a CDTA, to offshore entities for the purpose of exempting them from obligations regarding substantial activities requirements. • Therefore, the IRD has no plan to issue a special class of CoR or other documentation proof for serving the offshore ES law purpose or other non-treaty purpose. • Taxpayers may request the IRD to 57
issue a letter to confirm the factual tax information of the taxpayers, e.g. confirmation of tax payment. However, whether the information on such document would be regarded as relevant remained a matter for the foreign jurisdictions to determine.
Completion of Supplementary Form S2 of the Profits Tax Return Question: The IRD’s guidelines on the completion of Supplementary Form S2 – transfer pricing do not contain any definition of “transactions.” Should transactions which would not result in any impact to the income statement, e.g. interest-free loans, be reported? Answer: • The term “transaction” was defined in the transfer pricing provision, section 50AAI(1), to include any operation, scheme, arrangement, understanding and mutual practice (whether express or implied, and whether or not enforceable or intended to be enforceable by legal proceedings). • Paragraphs 43 to 46 of Departmental Interpretation and Practice Note 59 explained with examples the terms “transaction” and “a series of transactions.” • Transactions that fall within the definitions need to be reported even if there are no transfer pricing adjustments and no changes in the intercompany balances during the year.
E-filing of tax returns The IRD is developing three October 2020
interconnected portals, namely Business Portal, Individual Portal and Tax Representative Portal. These are planned to be rolled out in 2025. During the meeting, questions were raised about the portals. Question: What is the timetable for extending the e-filing system for Tax Return – Individuals (BIR60), so that more individuals in Hong Kong can file electronically, including those with income exemption and double tax relief claims? Is there any plan to allow tax representatives to e-file their clients’ BIR60?
and tax computations in the form of data files. It is expected that the enhanced eTax portal would be able to accept e-filing of profits tax return (BIR51 or BIR52) for a taxpayer by a service provider, subject to the relevant legislative amendments. To conclude, the answers provided by the IRD during the meeting serve as good guidance on the tax issues that taxpayers are facing. The 2021 annual meeting with the IRD will be held in mid-2021. If you would like to contribute questions to the meeting, please send them to apd@hkicpa.org.hk before the end of January 2021.
Answer: In designing and developing the Tax Representative Portal, the IRD will consider enabling tax representatives to file BIR60 for their clients. Question: The IRD advised in the 2019 annual meeting that it would consult the stakeholders in the development of the Business Portal and Tax Representative Portal for profits tax. What is the current status? Answer: • The Business Portal would facilitate submission of tax returns by businesses together with accounting and financial data. • The Tax Representative Portal would enable tax representatives to conduct e-transactions on behalf of their clients, both individuals and businesses. • In the interim, the existing eTax portal would be enhanced to cater for the submission of financial statements
The article is contributed by Sarah Chan, Tax Partner, Deloitte China, Doris Chik , Tax Director, Deloitte China and Eric Chiang , Deputy Director, Advocacy and Practice Development, Hong Kong Institute of CPAs 58
The interaction of the accounting standards with the tax laws – HKFRS 15 and HKFRS 16 A look at tax principles for determining whether and when accounting profits or losses are taxable or deductible The Inland Revenue Department (IRD) has recently updated Departmental Interpretation and Practice Note No. 1 (revised DIPN 1) which deals with the valuation of stock-in-trade and the taxation of long-term construction contracts, property development and property investment. At the outset, revised DIPN 1 indicates that where the accounts of a person are drawn up in accordance with the ordinary principles of commercial accounting and are in conformity with the Inland Revenue Ordinance (IRO), no further tax adjustments are required or permitted. Revised DIPN 1 cites CIR v. Secan Ltd & Another (2000) 3 Hong Kong Court of Final Appeal Reports (HKCFAR) 411 in support of this position. However, the accounting profits or losses would nonetheless need to be disregarded for tax purposes under the two cardinal tax principles established in Nice Cheer Investment v. CIR (2013) 16 HKCFAR 813: (i) “profits” connotes realized but not unrealized profits; and (ii) neither profits nor losses can be anticipated.
HKFRS 15 Recognition of revenue Before Hong Kong Financial Reporting Standard (HKFRS) 15 Revenue from Contracts with Customers became effective on 1 January 2018, revenue recognition of long-term construction contracts, including contracts for the pre-sale of units of property development projects, was governed by several accounting standards and interpretations. Some taxpayers have expressed the view that the variable consideration of a customer contract, recognized as revenue October 2020
in the accounts under HKFRS 15, may represent unrealized profits. As a result, such consideration should not, based on the principles established in the Nice Cheer case, be taxable until the amount is contractually due. Under HKFRS 15, a person has to recognize variable consideration as revenue when performance obligations are satisfied, and it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur as a result of a change in the estimate of the variable consideration. Revised DIPN 1 notes that while an element of estimation may be involved when an amount of variable consideration under a customer contract is recognized as revenue, the amount so recognized would nonetheless be taxable, realized profits or losses. The IRD has also previously indicated that unlike notional year-end revaluation gains in respect of listed securities held for trading purposes, such as in the Nice Cheer case, variable consideration recognized as revenue under HKFRS 15 stems from the performance of a customer contract which is an actual business transaction. As such, any amount so recognized cannot generally be regarded as being unrealized profits. Imputed interest Under HKFRS 15, a contract is considered to contain a significant financing component if the timing of payments agreed to by an entity and its customer under a contract (either explicitly or implicitly) provides a significant benefit as regards the financing of the transfer of the goods or services to the entity or the customer. Where a significant financing
component is involved, an entity is required to present the effect of financing (either interest income or expense) separately from the customer contract revenue, and thereby account for the effects of the time value of money. Revised DIPN 1 states that such imputed interest would be disregarded for tax purposes. This is because the legal form of a transaction generally takes precedence over its economic substance for tax purposes, i.e. an entity receiving advance or deferred payments from a customer has no legal obligations or rights to pay or receive interest to or from the customer. As such, tax adjustments will need to be made in tax computations to exclude such notional interest income or expense recognized under HKFRS 15. Taxpayers who wish to better understand how such tax adjustments are to be made can refer to examples 3 and 4 of revised DIPN 1. Transitional adjustments In the year a new accounting standard such as HKFRS 15 is first adopted, entities are generally required to account for the transitional adjustments under either of the following two methods: (a) Full retrospective method: retrospectively to each prior reporting period presented in accordance with Hong Kong Accounting Standard (HKAS) 8 Accounting Policies, Changes in Accounting Estimates and Errors; or (b) Modified retrospective method: retrospectively with the cumulative effect of initially applying the relevant accounting standard at the date of initial application. Regardless of the method adopted, 59
revised DIPN 1 indicates that any upward or downward transitional adjustments which are revenue in nature would be taxable or deductible in the year of assessment for which the accounting standard or policy is first adopted. This would be the case notwithstanding that the adjustments are not reflected in the profit and loss account but in the opening balance of the retained earnings for the year concerned. Revised DIPN 1 cites Pearce v. Woodall-Duckham [1978] 51 TC 271 in support of such a tax treatment.
HKFRS 16 The IRD has also recently published guidance titled Profits Tax Treatment of Leases Where HKFRS 16 Applies on HKFRS 16 Leases. Depreciation for ROU asset and imputed interest on leased liability Under HKFRS 16, the balance sheet of a lessee of an operating lease would recognize a right-of-use (ROU) asset representing their right to use the underlying leased asset and a lease liability representing the present value of the future lease payments that the lessee is obliged to pay. Depreciation charges for the ROU asset and the imputed interest on the lease liability would be reflected as an expense in the profit and loss account of the lessee of an operating lease. In other words, the accounting treatment reflects the economic substance of the transaction as being the lessee acquiring a ROU asset for use over the term of the lease. Notwithstanding the aforesaid accounting treatment of an acquisition of asset, the guidance indicates that where the lease concerned is in legal October 2020
form an operating lease, the combined depreciation charges for the ROU asset and imputed interest charged to the profit and loss account represents rentals for the recurrent use of the asset. As such, the two amounts as recognized in the accounts on an accrual basis are both revenue in nature and are tax deductible. This would be the case regardless of whether the two amounts represent lease payments that contractually fall due in the accounting period concerned. In straightforward cases, the total amount of the depreciation of the ROU asset and the imputed interest on the related lease liability as recognized in the accounts will equal the total amount of the contractual lease payments over the term of a lease. However, the two total amounts may not be equal in one particular accounting period. Given the matter is essentially only a timing issue, the guidance indicates that, where no element of tax avoidance is involved, the IRD would also accept taxpayers instead claiming tax deductions consistently based on the lease payments that contractually fall due in the years of assessment concerned. Impairment loss of a ROU asset HKFRS 16 requires a lessee to apply HKAS 36 Impairment of Assets to determine whether a ROU asset in respect of an operating lease is impaired and to account for any impairment loss identified. Where an impairment indicator is present, e.g. business operations are significantly curtailed or disrupted due to the coronavirus pandemic, an entity needs to estimate the recoverable amount of its ROU asset. This would involve the entity estimating the net cash flows expected to be generated from the use of
the ROU asset over its remaining useful life. Impairment losses arise where the carrying amount of the ROU asset exceeds its recoverable amount. The guidance apparently presumes that such an impairment loss would only represent anticipated losses in most cases and, as such, would not be tax deductible based on the principles established in the Nice Cheer case. However, such an impairment loss would also reduce the carrying value of the ROU asset, the depreciation of which would have otherwise represented part of the total rental expense charged to the profit and loss account and be deductible for tax purpose. In other words, the depreciation charges in respect of the ROU asset, after its carrying value is reduced by the impairment loss, together with the imputed interest in respect of the related lease liability, would now only represent part of the total rental expense actually incurred. Such part of the depreciation charges on ROU asset and the imputed interest on the related lease liability combined would be tax deductible. As such, the guidance indicates that the IRD would allow the impairment loss to be spread over the remaining term of the lease on a straight-line basis for tax deduction. Similarly, if the impairment loss is subsequently reversed, the reversal would likewise be spread over the then remaining term of the lease on a straightline basis for tax assessment. The combined effect of allowing (i) the tax spreading of an impairment loss and any subsequent reversal in the aforesaid manner; and (ii) the tax deduction of the depreciation charges in respect of the remaining carrying value of the ROU asset and the imputed interest on the related 60
lease liability, would then approximate the total rental expense actually incurred for each of the years of assessment concerned. Fair value changes in respect of sub-leasing an operating lease valued as an investment property Under HKFRS 16, if an operating lease is sub-leased by an entity to another party (i.e. the entity becomes an intermediate lessor), the entity is required to account for the head lease and the sub-lease as two separate contracts. Where the entity classifies the sublease as an operating lease, the entity would retain the lease liability and the ROU asset pertaining to the head lease. If the ROU asset in respect of the head lease meets the definition of an investment property, the entity can apply the fair value model to the ROU asset in accordance with HKAS 40 Investment Property, i.e. the ROU asset would be valued based on its market value at each year-end, with any change in value being charged to the profit and loss account. As such, unlike the cost model, there would be no depreciation charges in respect of the ROU asset. The guidance indicates that such fair value changes in respect of the head lease would not however be taxable or deductible. This is because such gains or losses would not, based on the principles established in the Nice Cheer case, represent realized profits or losses. Nonetheless, in order to approximate the rental expense actually incurred that would otherwise have been reflected through depreciation charges in respect of the ROU asset, the guidance indicates that the amount of the ROU asset as initially recognized would generally be allowed to be spread over on a straight-line basis October 2020
over the term of the head lease for tax deduction purposes. Thereby, the ROU asset together with the related imputed interest are both deductible over the term of the lease. Or alternatively, the claims for tax deduction can be made consistently based on the amounts of lease payments that contractually fall due in the years of assessment concerned. For a fuller understanding of the tax adjustments required, taxpayers can refer to example 3 of the guidance which illustrates with numerical figures of the accounting entries involved in such a case.
accuracy, and hence not be deductible under the principles established in the Nice Cheer case, there could be exceptions. For instance, in the United Kingdom case Herbert Smith v. Honour 72 TC 130, the provision for losses in respect of vacated office premises that were sub-let for the entire remaining term of the leases at a rent substantially below the rent payable by the taxpayer, was held to be deductible. The above indicates that whether and how tax adjustments are made can be complicated in certain circumstances. Taxpayers should seek professional advice where necessary.
Commentary We welcome the IRD’s explanation of the interaction of the relevant accounting standards with the tax laws, duly supported by extensive case-law authorities. Revised DIPN 1 and the guidance indicate that while it is matter of law whether a profit constitutes profits falling within the scope of charge under the IRO, the timing of when such a profit arises is more a matter of fact. In the latter respect, the evidence of accounts prepared under generally accepted accounting principles (GAAP) such as those applicable to the recognition of variable consideration as revenue under HKFRS 15 would be persuasive. Similarly, the evidence of accounts prepared under GAAPs such as those under HKFRS 16 would also be persuasive for determining the timing when an expense is incurred for tax purposes. Nonetheless, while an impairment loss in respect of an operating lease similar to the one discussed above would generally represent anticipated losses which may not be ascertainable with sufficient
This article is contributed by Jo An Yee, International Tax and Transaction Services Partner, Sharon To, Director, Winnie Kwan, Senior Manager, of Ernst & Young Tax Services Ltd. 61
An overview of the OECD’s Base Erosion and Profit Shifting 2.0 Pillar One blueprint OECD releases BEPS 2.0 Pillar One blueprint on the allocation of taxation rights between jurisdictions and invites public comments Background On 12 October 2020, the Organization for Economic Cooperation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting released two detailed “blueprints” in relation to its ongoing work to address the tax challenges arising from the digitalization of the economy. The OECD welcomes comments on the proposals by 14 December 2020, and will hold a virtual public consultation meeting in mid-January 2021. This article considers the Pillar One blueprint, proposals which address the allocation of taxing rights between jurisdictions and considers various proposals for new profit allocation and nexus rules. The blueprint contains three elements: (a) New taxing rights for market jurisdictions over a share of the (deemed) residual profits of a multinational enterprises group (MNE) or segment of such a group (Amount A) (b) A fixed return for certain baseline marketing and distribution activities taking place physically in a market jurisdiction (Amount B) (c) Processes to improve tax certainty through effective dispute prevention and resolution mechanisms Looking ahead, the blueprint references the need for the framework to focus on the remaining political and technical issues, including issues related to scope, quantum, the choice between mandatory and safe harbour implementation, the new tax certainty procedures with respect to Amount A, and enhanced tax certainty procedures for issues beyond Amount A.
Amount A Scope Regarding the scope of Amount A, two types of tests would apply, namely, the November 2020
activity and threshold tests. The activity tests are designed to capture those MNEs that participate in a sustained and significant manner in the economic life of a market jurisdiction, without necessarily having a commensurate level of taxable presence in that market under existing nexus rules. This covers MNEs in either or both of the following categories: automated digital services (ADS) and consumer-facing businesses (CFB). ADS are generally defined as services that are both automated (i.e., the provision of the service to a particular user requires minimal human involvement) and digital (i.e. provided over the Internet or an electronic network). It was noted in the blueprint that ADS could be provided remotely and to markets where the MNE has little or no infrastructure to a large number of customers (or users). The definition of ADS is comprised of positive and negative lists of activities and a general definition. The positive list includes online advertising services, sale or other alienation of user data, online search engines, social media platforms, online intermediation platforms, digital content services, online gaming, standardized online teaching services and cloud computing services. An activity on the negative ADS list is not an ADS activity. The negative list includes customized professional services, customized online teaching services, online sales of goods and services other than ADS, revenue from the sale of a physical goods irrespective of network connectivity, and services providing access to the Internet or other electronic networks. If an activity is not on either list, the general definition applies. The general definition is included as a supplement to the two lists to account for the rapidly changing nature of digitalized business models. CFB are businesses that generate revenue from the sale of goods and
services of a type commonly sold to consumers, including those selling indirectly through intermediaries and by way of franchising or licensing. To be considered a CFB, the MNE should be: (i) the owner of the consumer product/ service and holder of the rights to the connected intangible property (including franchisers and licensers); or (ii) the “retailer” or other contractual counterparty of the consumer. The following activities are specifically excluded from Amount A: certain natural resources; certain financial services; construction, sale and leasing of residential property; and international airline and shipping businesses. For activities that may be both ADS and CFB, the ADS definition applies. The threshold tests for Amount A are divided into (i) a global revenue test and (ii) a de minimis foreign in-scope revenue test. The €750 million threshold that is used for country-by-country reporting purposes would be used under the global revenue test. Under the de minimis foreign in-scope revenue test, revenue from the in-scope activities (i.e. from ADS or CFB) should be determined first. Then, one should check if this revenue is related to “foreign” activities. The blueprint uses a threshold of €250 million in an example illustrating this test. In order to deliver a solution in 2020 in accordance with the original G20 mandate, some jurisdictions advocated for a phased implementation with ADS coming first. As an alternative to an activities-based test for scope, the United States has proposed implementing the new taxing right on a “safe harbour” basis, which would enable an MNE to elect on a global basis to be subject to Pillar One. Many jurisdictions have expressed scepticism about such an approach. Nexus The blueprint sets out different nexus 62
rules for ADS and CFB. For ADS, nexus would be established by exceeding a market revenue threshold. Because through the provision of ADS, MNEs can participate in the economic life of market jurisdictions without a physical presence, a revenue threshold is the only test to establish nexus for ADS. For CFB, the nexus standard requires a significant and sustained engagement in the market jurisdiction beyond mere sales. The “plus factor” is a subsidiary or permanent establishment (PE) that carries out activities in the market jurisdiction that are connected to in-scope sales. This plus factor would entail a physical presence test with relevant sales-related activities. Further work on the nexus requirements will relate to the decision whether to apply a temporal requirement to avoid the effects of isolated or one-off transactions and consideration of the possible use of a lower nexus standard for smaller developing countries and higher thresholds for large markets. Revenue sourcing The sourcing principles differ between ADS and CFB – and these broad categories are further subdivided based on business model. Each type of activity has its own set of sourcing rules, supported by a range of specific indicators. The blueprint also provides guidelines on documentation requirements, including the MNE’s internal control framework. Tax base determinations MNEs are permitted to rely on the Generally Accepted Accounting Principles (GAAP) used by the ultimate parent entity (UPE) in preparing consolidated financial accounts, provided this standard produces equivalent or comparable outcomes to International Financial Reporting Standards (IFRS). Profit before tax from the consolidated profit and loss statement prepared based on IFRS should in general be used as the starting point for the calculation. November 2020
To account for losses, the Amount A tax base rules will apply consistently at the level of the group or segment irrespective of whether the outcome is a profit or loss. Any losses arising from a taxable period will be preserved and can be carried forward to subsequent years through an “earn-out” mechanism. Losses from one segment will not be available to offset losses in another segment.
were not intended to apply. This would be particularly relevant for decentralized businesses that realize residual profits in a large number of entities and jurisdictions. The title of the safe harbour suggests that this issue of existing in market residual profits is only relevant for CFB. However, it is not clear why the same should not apply to ADS business models where in market residual profits are realized and taxed.
Profit allocation The Amount A formula is comprised of three distinct components rather than based on the arm’s length principle: Step 1: A “profitability threshold” to isolate residual profits potentially subject to reallocation. Step 2: A “reallocation percentage” that defines the share of residual profits (actual profits minus the profitability threshold), or allocable tax base, that is allocated to market jurisdictions. Step 3: Use of an allocation key to allocate the allocable tax base among the eligible market jurisdictions.
Amount B
The allocation key (step 3) defines the mechanism for allocating the Amount A profit to eligible market jurisdictions (i.e. jurisdictions with Amount A nexus). The allocation is based on in-scope revenues and could be implemented through either a profit-based or profit margin approach. The issue of double counting Amount A is an overlay to the existing income tax system, and interaction with that system could lead to duplicative taxation. Specifically, if the existing system already allocates residual profits to market jurisdictions, such profits may be taxed twice through regular transfer pricing rules and again through Amount A. Accordingly, a “marketing and distribution profits safe harbour” is included in the blueprint as an option. The safe harbour attempts to address situations to which the Pillar One rules
Amount B is intended to standardize the remuneration of related party distributors that perform “baseline marketing and distribution activities” in a manner that is aligned with the arm’s length principle. These rules are intended to simplify the administration of transfer pricing rules and reduce compliance costs, while also enhancing tax certainty and reducing controversy. Amount B will apply to entities or PEs with existing nexus, and as such is not related to the new nexus rules of Amount A. Importantly, the scope limitations of Amount A relating to the activity tests and threshold tests are not applicable to Amount B. The controlled transactions in scope of Amount B could consist of (i) the purchase of products from related parties for resale to unrelated customers predominantly, and the associate performance of baseline distribution activities; and (ii) the performance of baseline marketing and distribution activities in the state of residence, transacting or dealing with a foreign associated enterprise. Amount B would apply to distribution activities that according to the accurate delineation of the transaction would be characterized as a routine distributor. Marketing and distribution activities will be identified as in- or out-of-scope activities by reference to defined “positive lists” and “negative lists” of qualitative factors. These lists include examples of functions, assets and risks that 63
would be (positive list) and would not be (negative list) expected of a distribution entity with baseline activities. Certain quantitative factors would also be used to further support the identification of in-scope activities. The current intention is for Amount B to apply to a relatively narrow scope of entities that would generally be characterized as a routine distributor in relation to a controlled transaction, excluding commissionaires and sales agents. However, some inclusive framework members want to explore the feasibility of broadening the scope. The quantum of Amount B and thereby the remuneration for the baseline marketing and distribution activities will be determined using the transactional net margin method. A rebuttable presumption may be introduced for cases where evidence is provided that another transfer pricing method is the most appropriate method to use. Amount B would be implemented through domestic law or regulations. The blueprint indicates that existing treaties can resolve disputes over Amount B. Where there is no treaty in place, a new treatybased dispute resolution mechanism may be required.
Tax certainty and dispute resolution Regarding Amount A, a mandatory binding dispute prevention process that aims to address in advance potential issues regarding Amount A was proposed – such as the correct delineation of business lines and calculation of profits, the existence of nexus, or the identification of paying entities. The process would be based on an MNE’s self-assessment that would be reviewed by a representative review panel in the first instance and, if no agreement can be reached at that stage, November 2020
by a determination panel in the second instance. The agreement reached in this process would be binding on all relevant tax administrations and on the MNE. The tax certainty approach beyond Amount A includes a number of steps, including dispute prevention, use of the existing mutual agreement procedure (MAP), as well as a new mandatory binding dispute resolution mechanism. For developing countries, elective binding dispute resolution is contemplated. Finally, the inclusive framework is exploring a mandatory binding dispute resolution for MAP cases that remain unresolved after an agreed period. The inclusive framework would agree on the defined period after which the dispute resolution mechanism would be triggered and the mutual agreement would be submitted to a panel of experts (a determination panel) who would reach a decision.
changes to the overall international tax rules under which businesses operate. It is important for businesses to follow these developments closely in the coming months and to consider engaging with the OECD and policymakers at both national and multilateral levels on the business implications of these proposals. Businesses also should evaluate the potential impact of these proposed changes. If no agreement can be reached by mid-2021, it is expected that many countries will introduce digital services taxes. Moreover, countries could introduce other elements of the Pillar One architecture through their domestic legislation, such as for example a variation of Amount B. If there is no coordinated global agreement, this would be expected to lead to a rise in double taxation and controversy.
Implementation and administration The blueprint indicates that the implementation framework for Pillar One is yet to be developed. This will require action across three different aspects: domestic law, public international law and guidance to supplement these two elements. On the key question of removal of unilateral measures, it is expected that any consensus agreement will require a commitment for such removal. However, no implementation guidance on this has been developed yet.
Conclusions The proposals under Pillar One represent a substantial change to the tax architecture and go well beyond digital businesses or digital business models. These proposals could lead to significant
This article is a summary of an EY Global Tax Alert, released on 19 October 2020 64
An overview of the OECD’s Base Erosion and Profit Shifting 2.0 Pillar Two blueprint OECD releases BEPS 2.0 Pillar Two blueprint on the implementation of the global minimum level of tax and invites public comments
On 12 October 2020, the Organization for Economic Cooperation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting released two detailed “blueprints” in relation to its ongoing work to address the tax challenges arising from the digitalization of the economy. The OECD welcomes comments on the proposals by 14 December 2020, and will hold a virtual public consultation meeting in mid-January 2021. This article considers the Pillar Two blueprint, proposing a set of interlocking international tax rules designed to ensure that large multinational businesses pay a minimum level of tax on all profits in all jurisdictions, and focuses on Hong Kong implications and policy responses to the blueprint. The blueprint includes the following key elements: • The Global Anti-Base Erosion income inclusion rule and the undertaxed payments rule: Connected rules that are intended to ensure large multinational groups pay tax at a minimum level in each jurisdiction in which they operate. These share common rules for scope, and for calculating effective tax rates (ETRs) and top-up amounts. Both rules only apply to multinational groups with consolidated global revenues of at least €750 million. - The principal rule is the income inclusion rule (IIR), which would trigger additional “top-up tax” payable in a group’s parent company jurisdiction where the profits of group companies November 2020
in any one jurisdiction are taxed at an ETR below a minimum. A switch-over rule would apply similarly to ensure branches are within scope. - An undertaxed payments rule (UTPR) acts as a backstop for low-taxed group companies not controlled by a parent company subject to the IIR. • The subject to tax rule (STTR): A separate rule that applies before the IIR and UTPR. Paying (source) jurisdictions would be able to charge a top-up tax in respect of specific types of intragroup payments made to other group companies, where the recipient jurisdiction has a nominal tax rate less than a minimum tax rate. The rule would be applied on a payment-by-payment basis, but could be calculated and administered by way of an annual return.
Implications of the GloBE rules for Hong Kong taxpayers Groups with jurisdictional ETRs below the minimum The Global Anti-Base Erosion (GloBE) rules would only apply where jurisdictional ETR falls below a certain minimum ETR at which point the IIR or UTPR would apply. Consensus has not been reached on the minimum ETR. However, examples in the blueprint use various tax rates between 10 percent and 12.5 percent. While these rates are lower than Hong Kong’s headline tax rate of 16.5 percent, the presence of offshore claims or exempt capital disposals and other adjustments may decrease a
group’s ETR below the minimum. Groups below the minimum ETR may be subject to top-up tax and may not be able to benefit from certain favourable aspects of Hong Kong’s tax system such as exemptions, reliefs and incentives. Inbound versus Hong Kong headquartered groups Under the proposed rules, there would be a difference between groups that are inbound into Hong Kong and those that are headquartered in Hong Kong. Generally, where a group that is headquartered outside Hong Kong has implemented an IIR, the Hong Kong based operation would be subject to an IIR, such that top-up tax may be collected in respect of Hong Kong entities. However, absent a change in domestic law, the Hong Kong operation of a Hong Kong headquartered group would not be subject to the IIR of any jurisdiction, while the part of the group that operates outside Hong Kong may be subject to top-up tax from another jurisdiction's IIR. In this instance, UTPR may be applied elsewhere in the group in respect of certain intragroup payments, and top-up tax may be paid in respect of the Hong Kong headquartered operation by those jurisdictions that have an ETR above the GloBE minimum and are therefore eligible to collect top-up tax under the UTPR. As a result of limitations on the tax that can be collected under the UTPR, where intragroup payments are relatively low, groups may pay less tax overall through the application of the UTPR as compared to the IIR. 65
U.S. headquartered groups While consensus has not been reached on treating the United States Global Intangible Low-Taxed Income (GILTI) regime as a valid IIR for the purposes of the GloBE rules, the blueprint specifically addresses the need to consider this issue further and outlines the rationale for treating GILTI as an IIR. If GILTI were to be treated as an IIR, this would effectively create a new category of taxpayers under GloBE – those with an ultimate, or in certain cases, intermediate, U.S. headquarters. While GILTI has certain similarities to the IIR proposed under GloBE, it also has significant differences, which may complicate jurisdictions’ policy responses to GloBE. Funds The Pillar Two blueprint specifically excludes investment funds on broad policy grounds. The exclusion applies where the ultimate parent entity of a group that would be subject to GloBE qualifies as an investment fund. Currently, investment funds owned by a group that undertakes a non-investment management business are not covered by the exclusion, however the consultation document will explore further whether this is necessary, and how the exclusion could be broadened to cover these scenarios. There is significant overlap between the investment funds exclusion under the blueprint and the unified fund exemption under Hong Kong tax law. While each fund and its subsidiary entities would need to be considered on a case-by-case basis, a significant population of funds that are incorporated, established, or administered November 2020
in or from Hong Kong should be excluded from these rules. Importantly, offshore funds that are exempt under section 20AC of the Inland Revenue Ordinance, and do not qualify under the unified funds exemption, may not fall within the Pillar Two blueprint exemption based on the current definition of “investment fund.” Banks, broker dealers, and other share traders Dividends received, and share trading gains and losses in respect of portfolio shareholdings would be included in the GloBE tax base of the recipient, whereas amounts in respect of non-portfolio shareholdings would not. The treatment of covered taxes would follow the inclusion or exclusion of income in order to provide symmetry. The conditions or thresholds to be met for a shareholding to be considered a portfolio holding are to be determined. However, portfolio shareholdings typically are shareholdings of a relatively low percentage, often less than 10 percent of the total ordinary shares issued. Hong Kong does not tax dividends, or share trading gains in respect of transactions executed on an exchange outside of Hong Kong. Accordingly, groups engaged in share trading are likely to have relatively low ETRs, particularly where share trading represents one of their main activities and therefore may be significantly affected by GloBE. Helpfully, covered taxes would be taken into account, and it appears that taxes in excess of the minimum ETR may be blended with those below the minimum
ETR in order to reduce the top-up tax that an entity may be required to pay. Anti-avoidance rules would be introduced to prevent the intentional shifting of withholding tax to a jurisdiction in order to increase its ETR and thus reduce the amount of top-up tax payable. However, the focus of these rules is likely to be passive income and therefore commercial trading portfolio aggregation may be acceptable. Life insurance companies Several considerations are unique to insurance companies. Firstly, life insurance companies, particularly those taxed under the 5 percent net premium basis, are taxed in a manner that is entirely disconnected from the accounts. Applying the IIR or UTPR based on a minimum ETR in this instance could effectively change the basis of taxation for these insurance companies, and would likely lead to a significant increase in taxation. This will be further complicated by the implementation of International Financial Reporting Standard 17 Insurance Contracts. The Pillar Two blueprint provides an exclusion for investment returns of life insurance policyholders where the policyholder is beneficially entitled to the investment return. However, for most investment-linked products written by life insurance companies in Hong Kong, the life insurer remains beneficially entitled to this income until it is paid to a policyholder. Accordingly, this exclusion would need to be broadened significantly in order to be useful. 66
Implications of the STTR for Hong Kong The STTR would operate differently to the GloBE rules and reference a nominal minimum tax rate instead of a minimum ETR. The focus of the STTR is not on considering the jurisdictional ETR of the recipient, but on whether an individual payment would be subject to a minimum rate of tax under the tax law of the relevant jurisdiction. Where a payment is not subject to a minimum nominal tax rate and a jurisdiction has ceded its taxing rights through a treaty, top-up tax may be applied in order to increase the applicable tax rate up to the minimum. The minimum nominal tax rate is yet to be determined, although it is likely to be below the minimum ETR used for the purposes of GloBE in order to reduce instances of over-taxation. The STTR would apply before the GloBE rules and would be limited to certain payments between related parties. The STTR could have significant implications for Hong Kong and due to its application to payments, could apply even where a group has a high jurisdictional ETR for purposes of the GloBE. Offshore claims and the use of incentives applying to related party payments such as the corporate treasury centre may be particularly affected.
Hong Kong policy response to Pillar Two Groups with a Hong Kong jurisdictional ETR lower than the minimum are likely to November 2020
be subject to top-up tax in respect of their Hong Kong operations, representing an overall increase in taxation for the group. This is problematic for Hong Kong as its attractiveness may be eroded by the additional tax burden, particularly as the additional revenue would not be collected in Hong Kong, but by another jurisdiction. This additional tax burden may be interpreted as penalizing groups for operating in Hong Kong. Some may question the fairness of such a rule as limiting the fiscal policy options available to Hong Kong, which is a highly developed and fiscally responsible economy operating a low, yet robust, tax regime. Given that top-up tax in respect of Hong Kong based operations likely would be collected by the tax authorities of other jurisdictions, Hong Kong may wish to consider introducing rules that would ensure that any such top-up tax must be paid in Hong Kong. Such rules could be tailored to align with the GloBE and STTR rules precisely so as to minimize the impact to groups that would not be affected by those rules. This should allow the jurisdictional ETR of the relevant multinational group to be raised to the minimum ETR through the payment of tax within Hong Kong. The additional revenue could then be used to further incentivize investment into Hong Kong. As discussed above, Hong Kong headquartered groups would be affected differently than inbound multinationals. They could be subject to the UTPR, but should not be subject to the IIR of another jurisdiction. Accordingly, they may prefer not to pay a minimum tax in Hong Kong
that is modelled on the GloBE and STTR. Consideration should be given to the policy approach towards these groups and whether differing rules are desirable in the context of fairness, harmful tax practices, revenue collection, and the general attractiveness of Hong Kong. Overall, Hong Kong's ability to pursue certain fiscal policy aims may be curtailed by Pillar Two and Hong Kong will need to be mindful of the implications of Pillar Two when making policy decisions. Beyond attempting to retain and improve existing fiscal policy measures, it may be necessary to adopt a more nuanced policy approach in the future, recognizing the importance of a group’s position under Pillar Two, and in particular its marginal tax rate, when making investment or rationalization decisions.
The article is contributed by Jonathan Culver, Tax Partner, Deloitte China 67
Examining the new DIPN covering ship leasing and management tax concessions A look at the implications of the Inland Revenue Department’s newly-issued DIPN 62 The Inland Revenue Department (IRD) has released Departmental Interpretation and Practice Note (DIPN) No. 62 Taxation of Ship Leasing Activities, setting out its views on the implementation of the ship leasing and ship leasing management concessions introduced in the Inland Revenue (Amendment) (Ship Leasing Tax Concessions) Ordinance 2020, enacted in June.
Overview of the new tax concession Under the new tax concessions, qualifying ship lessors would be chargeable to profits tax on their qualifying business operations, as defined in the relevant provisions in the Inland Revenue Ordinance (IRO) at a concessionary rate (i.e. 0 percent for the year of assessment commencing on or after 1 April 2020). In addition, qualifying ship leasing managers would be charged at half the normal profits tax on profits generated from qualifying business activities, or 0 percent where the services are intragroup. The legislation, while providing a useful tax concession for certain businesses, also raised a number of questions for others. DIPN 62 addresses some, but not all, of these concerns. Incidental income In paragraph 7 of the DIPN, the IRD has stated that qualifying profits includes income incidental to profits from a ship leasing business, like interest income, exchange gains or hedging gains, as long as the transactions are ancillary to the qualifying activities. This appears to be a concession as the legislation does not December 2020
contain any mention of incidental profits, leaving the risk that a small amount of bank interest could have prevented the lessor from qualifying for the reduced tax rate. Substance requirements It is a condition of the concession that central management and control be exercised in Hong Kong. The DIPN stresses the role of day-to-day work by the directors in Hong Kong. From a practical perspective, the IRD’s comments show the importance of ensuring that the directors are competent to perform their role, that they are provided with the relevant information to make their decisions and are seen actively to investigate whether proposals are in the best interests of the company, and that board meetings are properly held and minuted. Anyone claiming the concession is required to have substance in Hong Kong. For ship leasing activities, this consists of at least two full-time employees with appropriate qualifications and at least HK$7.8 million of operating expenditure in Hong Kong. For ship leasing management activities, the appropriate minimums are at least one full-time employee and at least HK$1 million in operating expenditure. In addition, the number of employees and the amount of the expenditure must be adequate in the opinion of the assessor and they must undertake the business’ core income generating activities (CIGAs) in Hong Kong. The CIGAs are defined to align with the definition of a ship leasing activity in schedule 17FA of the IRO. These are: agreeing funding terms, identifying or acquiring ships to be leased, setting the lease terms and duration, monitoring
or revising any funding agreements and managing any risks associated with leases. A wide range of expenditure will be regarded as operating expenditure including staff costs, rental and admin costs. It also includes any finance costs directly related to the acquisition of a ship for use in the leasing business. Importantly, provided the loan is taken out for the purpose of acquiring a ship for use in a Hong Kong ship leasing business, the IRD will accept that it is incurred in Hong Kong even if it is borrowed from an overseas financial institution. The DIPN does not discuss the case where the money is borrowed from someone other than a financial institution, for example a related party, although logically the same test should apply. The DIPN states that depreciation on the vessel cannot be included as operating expenditure on the basis the ship is used for earning lease payments but not for carrying out CIGAs. It is a little hard to follow the logic here, given that they have accepted that interest payments on loans taken out to acquire the vessel can be included. Nevertheless, it is unlikely many lessors will need to rely on depreciation to meet the expenditure threshold, provided they have incurred sufficient interest expense. The DIPN confirms that outsourcing of CIGAs to an associated person in Hong Kong is allowed provided that an arm’s length fee is charged and appropriate monitoring is undertaken by the special purpose vehicle (SPV). In this case the number of employees employed by and the service fee paid to the associated person can be taken into account in determining whether the substantial 68
activities requirement is met. Note that the wording of the relevant section does not make it clear whether the total number of employees and expenditure is to be determined on a per-SPV basis or on a group basis. It will typically be easy for a SPV to meet the expenditure threshold, provided the SPV is incurring interest on the acquisition of the ship. From any commercial perspective, the number of employees adequate to run a business is more closely related to the number of vessels operated than the number of SPVs that may hold them, and in the case of a long term bare-boat charter business would clearly be substantially less than two per vessel. However, concerned taxpayers may wish to consider obtaining an advance ruling.
Our observations What is a lease and what is a ship operator? One of the biggest concerns that has not been fully addressed by the DIPN was that the envisaged segregation of the activities of ship owners into “pure leasing” and “ship operating” is not as clear as the IRD would have us believe. Many ship owners engage in a range of activities, seeking to maximize the return on their vessels in whatever ways they can, according to the nature of the market at different points in time. The nature of the market in recent years has tended to require greater flexibility on the part of ship owners to consider short-term charters or taking on greater operational risk. Against this kaleidoscope of activities, the legislation sought to impose an all-or-nothing test, posing problems for December 2020
more complex businesses. Unfortunately, the DIPN largely does not address these concerns. The DIPN reiterates that ship operators are not eligible for the exemption and that to be eligible a lessor must be acting as a standalone corporation engaging solely in ship leasing activities. It makes clear that the provisions can apply to leases regardless of whether the lessor provides the crew (i.e. both wet and dry leases). Although not addressed in the DIPN, the IRD has indicated in correspondence with concerned parties that some leasing arrangements may continue to fall within section 23B of the IRO. In particular, the IRD has stated that where a ship operator generates income from leasing a ship on a voyage charter or a time charter fully equipped, crewed and supplied, this will be treated as income of the ship operator’s ship operations. They have also stated that income from bare boat charters which are an incidental or ancillary activity of the ship operator may also continue to be assessed in accordance with section 23B. The test set out in the IRD’s correspondence is not straightforward and leaves room for interpretation. Nevertheless, it does appear that the IRD has accepted that there is a need for flexibility in the application of the two sets of rules in order to avoid the situation where a taxpayer ends up paying tax despite conducting business which is supposed to fall entirely outside the tax net. The exact application of the rules and how best to apply them is likely to vary from business to business, and ship owners should pay careful attention to this. It may be that the best way to obtain certainty is to apply for an advance ruling. It is disappointing that the IRD’s wider
comments on the distinction between operators and lessors did not make it into the DIPN. It is an important distinction for taxpayers to understand and one that the IRD is aware has caused concern. For Hong Kong to maintain its position as an international business hub, and for tax concessions designed to assist in that to be successful, it is vital that the IRD’s interpretations are made available publicly to all so that investors can have a clear understanding of their position. The IRD also reiterates the position, which is clear in the legislation, that to be a qualifying lease, the term must exceed one year, unless it is a sublease. A ship owner engaging purely in a charter hire business would need to be careful that they did not lease ships out for periods of less than a year if they did not want to crash out of the regime. The IRD’s solution appears to be to set up subleases, although clearly there would be commercial considerations to this. Substance requirements The IRD does not go into detail about what qualifications it would regard as appropriate for employees of a ship leasing business, but notes they would be expected to include the leasing manager, marketing manager, legal counsel, financial controller and credit risk analyst. The test to be applied is based on average employees over a year – this should be given attention as it is possible that any enterprise operating on the minimum number of employees could crash out of the regime if it has a vacancy for any period of time after an employee leaves. The comments on the adequacy test are concerning. The Commissioner of Inland Revenue will review each case on its facts 69
and circumstances taking into account a range of factors and would deny any tax benefit that seems disproportionately large relative to the number of employees employed and the amount of operating expenditure incurred in Hong Kong. The DIPN gives an example in which there are two ship leasing companies engaged in a similar business. One makes a larger profit, and has lower operating expenses and fewer employees than the other. Based on this comparison, the IRD’s view is that the more profitable company has prima facie failed the adequacy test and would be denied the concession unless sufficient evidence could be produced that CIGAs were being carried out in Hong Kong. The example as set out suggests that running an efficient business is seen by the IRD as a risk factor. We do not know why one business is more profitable than another – it may have fewer employees because it makes better use of technology or it may make more profit because it is better at adapting to customer requirements. Given the international nature of shipping, it is unlikely that many businesses can be entirely conducted within Hong Kong, especially where they involve the provision of crew or the undertaking of port agency services. A working assumption that making too much profit is in itself problematic risks making the incentive unattractive to investors. BEPS 2.0 The potentially fleeting nature of the exemption from tax on ship leasing activities is set out plainly in paragraph 27 et seq of the DIPN. Here, the IRD notes that the introduction of a minimum tax rate under Base Erosion and Profit Shifting (BEPS) 2.0 may mean that the 0 percent December 2020
tax rate is unsustainable and may rise. Investors should factor this in to their projected returns. While a fairly detailed blueprint for the minimum tax proposals under Pillar Two of BEPS 2.0 has been produced by the Organization for Economic Cooperation and Development (OECD), there are still many details to be finalized, not least the minimum tax rate itself. Discussion is still ongoing as to whether the shipping industry may be exempted from the minimum tax rules and if so what the scope of that exemption would be. Further, not all taxpayers and holding structures would necessarily be directly affected by the new rules. However, the legislation and the DIPN both clearly lay the groundwork for the tax rate to increase, and have set out rules for the calculation of a tax base should it become relevant. Of particular interest here is the 20 percent concession on the tax base for lessors under an operating lease. It is explained as a substitute for deprecation allowances, which lessors of ships operating outside Hong Kong are not allowed to claim under section 39E of the IRO. The minimum tax rules are likely make some adjustment to exclude some or all of the effect of accelerated capital allowances from the calculation of the effective tax rate, as this is a common adjustment in most jurisdictions. Again, the details have not yet been finalized, but there is a risk that by disallowing deprecation and instead allowing a notional deduction against income the Hong Kong rules will not fall within the scope of the accepted adjustments to effective tax rate. In this regard, the leasing regimes of other significant centres may more closely align with the BEPS model.
In the context of BEPS more widely, we also note that the DIPN spends a lot of time discussing various anti-avoidance provisions. While Hong Kong of course needs to be mindful of being seen to help profit shifting, the ship leasing rules have been reviewed by the OECD and it is important to remember that the purpose of the incentive is to encourage the ship leasing business in Hong Kong.
Conclusions The IRD has provided helpful clarifications on their interpretation of the legislation, although a number of uncertainties remain. Given the complexity of the arrangements and the IRD’s form on applying concessionary rates, taxpayers should review their business models to ensure compliance and may be well advised to seek a ruling to ensure their proposals are in line with the IRD’s view.
The article is contributed by Ivor Morris, Partner, KPMG Tax Services Limited 70
Article contributors
Soraia Almeida Senior Manager, Corporate Tax, KPMG Qualifications Bachelor of Laws (LL.B), Lisbon University Master of Business and Law, CATOLICA Lisbon, School of Business & Economics Advanced Diploma in International Taxation, CIOT Professional experience Soraia has over 8 years’ experience focusing on cross-border taxation matters and advising clients on both inbound and outbound investment structuring in the Asia Pacific region. Prior to relocating to Hong Kong, Soraia worked in the corporate and international tax departments of KPMG Thailand, KPMG Vietnam and KPMG Portugal. Soraia has extensive experience of advising international corporate investors, financial services and governmental (profit and non-profit) organisations on their investments and operations across Asia, including advising clients on tax and regulatory considerations on market entry, tax-efficient structuring of their transactions, and assist with international tax planning advice in relation to intellectual property, financing, cross-border migrations, global supply chains and use of tax incentives. Building from her law and business background, Soraia has acted lead tax manager in large inbound investment projects into Thailand, Vietnam and other southeast Asian jurisdictions through Hong Kong, including assisting with tax and legal due diligence procedures, structuring and review of key investment documentation such as Share Purchase Agreements. Darren Bowdern Partner, Deal Advisory, M&A Tax Head of Alternative Investments, KPMG Qualifications Bachelor of Commerce, University of Melbourne Fellow member, HKICPA Member, CA ANZ Professional involvements Director, AustCham, Hong Kong and Macau Vice-Chair, Finance, Legal and Tax Committee, AustCham Vice-Chair, Technical Committee, HKVCA Member, Tax Committee, AIMA Committee member, Tax and Financial Services Working Group, FSDC Professional experience Darren has more than 25 years’ experience of serving institutions in a wide range of industries in Hong Kong and Asia Pacific. Darren heads up the M&A Tax practice in Hong Kong. He has been advising on transactions in Asia Pacific with respect to tax matters, including due diligence reviews, investment holding structures and advising on cross border transactions. Many of these projects comprise of tax effective regional planning including consideration of direct and indirect taxes, capital and stamp duties, withholding taxes and the effective use of double taxation agreements. Darren also advises on establishing direct investment, private equity and other investment funds in Hong Kong and advises clients in a wide range of industries. Darren specializes in cross-border buy and sell-side M&A tax services (e.g. Tax Due Diligence, Tax Vendor Due Diligence), tax structuring, tax planning and optimization and international corporate tax issues, restructuring and optimization. Darren has extensive experience in working with the mainland Chinese market, including structuring acquisitions of investments in China. Article contributors
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Peter Brewin Partner, Financial Services Transfer Pricing, PwC Qualifications Chartered Accountant, ICAEW Professional experience Peter is a Partner in the Financial Services Transfer Pricing team with 18 years of tax and transfer pricing experience. Peter has specialised in transfer pricing for financial institutions since 2005 with a particular focus on the investment management sector. This work has ranged from documentation, to audit defence and APAs as well as work on the attribution of profits to permanent establishments. In addition to his time in London, Peter spent 3 years working in the PwC transfer pricing teams in Tokyo and one year with the PwC team in San Francisco on a variety of international transfer pricing projects. Rex Chan Tax Partner, PwC Beijing Qualifications Member, HKICPA Fellow member, ACCA UK Fellow member, AICPA Certified public accountant, State of Illinois, USA Professional experience Rex Chan started his professional career in China tax in Hong Kong since 1991, and then moved to Beijing in January 1998. Rex is PwC’s north China automotive industry tax leader and the engagement tax partner on a number of multinational companies and their China subsidiaries, including: • A few European automakers and their China joint ventures, auto-financing company, trading company and other affiliated entities in China. Rex’s team is retained as the group’s China tax advisor covering transfer pricing, customs, cross-border remittance, permanent establishments, tax accounting and other tax structures related consulting. • Famous Japanese automakers’ China holding company and investees, providing daily operational advice, and most recently a customs/transfer pricing project related to imported vehicles. • A US MNC with multiple business units in various industries, including energy and power, healthcare, transportation and financial services. PwC China has since become the MNC’s China preferred tax service provider under Rex’s leadership. • Another US MNC software company with its core business in database products and servers. Rex has been the engagement partner and the client’s key contact since 2009. Rex’s team has been helping the client in a couple of projects: obtaining turnover tax preferences on sublicensing fees, remittance of intercompany charges, new businesses development and various M&A projects. • Assisted a multinational client in discovering and understanding its multi-layered China taxation exposure of dividend chain; developed strategy and successfully helped the client eliminate the multi-layered taxation. • Identified key business issues for a cosmetic manufacturer client in a dispute with its business partner, helped the client prioritise the issues to be resolved by analysing the relevant implications of various business objectives. • Helped a US client successfully defend its high thin capitalization ratio in a transfer pricing audit, analysed the overall thin cap position by taking into account relevant commercial factors and business objectives, advised the client ways to manage the thin capitalization tax risk.
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Sarah Chan Partner, Tax and Business Advisory Services, Deloitte China Qualifications Fellow member, HKICPA Fellow member, ACCA Fellow member, TIHK Professional involvement Deputy Chair, Taxation Faculty Executive Committee, HKICPA Member, Taxation Faculty China Tax Sub-Committee, HKICPA Professional experience Sarah is a Tax Partner of Deloitte China and has more than 25 years of tax and business advisory experience. She is also the Lead Partner of Business Process Solution team of Deloitte Hong Kong office. Having previously worked in China and the USA, Sarah has extensive experience in advising MNCs on structuring transactions, business reorganization, operational re-modelling, cross-border financing and exploring investment options and exit plans. Her expertise also includes resolving contentious issues and disputes with local tax authorities and managing tax, financial and regulatory reporting of companies with multi-jurisdictions operations. Sarah’s main industry focuses are technology, consumer and industrial products, professional and financial services. William Chan Partner, Tax Services, Grant Thornton Hong Kong Qualifications Member, HKICPA Fellow member, ICAEW Certified Tax Adviser (Hong Kong) Certified Tax Agent, Qianhai Shenzhen Professional involvements Chair, Taxation Faculty Executive Committee, HKICPA Convenor, Taxation Faculty China Tax Sub-committee, HKICPA Professional experience William Chan is a partner of tax services at Grant Thornton Hong Kong Limited, a member firm of Grant Thornton International Ltd. William has over 20 years of experience in providing tax services. Prior to joining Grant Thornton Hong Kong, he worked in Big Four firms in the UK, Hong Kong and Mainland China. William’s expertise focuses on tax due diligence and transaction-related tax advisory work, including pre-deal structuring and post-deal integration tax services. He also specialises in cross-border tax advisory and has extensive experience in advising on suitable investment structures and vehicles for multinational companies investing in Hong Kong and Mainland China, and for PRC companies investing overseas. He has previously stationed in Shanghai for five years and advised on many domestic companies in their onshore and offshore acquisitions.
Article contributors
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Lorraine Cheung Partner, China Tax and Business Advisory Services, EY Qualifications Member, HKICPA Professional involvement Member, Taxation Faculty China Tax Sub-committee, HKICPA Professional experience Lorraine has been with EY for over 20 years. She has had extensive compliance and consulting experiences in China tax and been involved in many investment and re-structuring projects of various industries including trading, technology, imports/exports, computers manufacturing, pharmaceutical and health care, real estate development and many others. Her clients include a number of Fortune 500 companies. The spectrum of her advice spans across inbound investment by foreign companies, domestic tax affairs and controversies resolution. Her specialty also includes international tax planning and cross border structuring. Eric Chiang Deputy Director, Advocacy & Practice Development, HKICPA Qualifications Fellow member, HKICPA Fellow member, ICAEW Professional experience Eric is responsible for managing the Tax Faculty activities of the Institute. His major duties include: • reviewing the proposed new tax legislations in Hong Kong and consolidating comments from the committees and members on the proposed tax legislations in written submissions to the Government; • managing the government relationships in Hong Kong and China on tax matters; • organizing tax seminars and conferences to keep our members abreast on the latest Hong Kong, China and international tax developments; • co-ordinating and taking part in the annual technical exchange meetings with the IRD and the PRC tax authorities; • being the technical editor and an article contributor of the tax related publications of the Institute; and • being the Institute’s representative in the Tax Working Group in the Global Accounting Alliance network.
Article contributors
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Doris Chik Tax Director, National Tax Technical Centre, Deloitte Qualifications BBA (Professional Accountancy), Chinese University of Hong Kong MBA, University of Hong Kong Member, HKICPA Fellow member, ACCA Fellow member, TIHK Certified Tax Advisor Professional experience Doris Chik is a Tax Director of National Technical Centre and National Learning team of Deloitte in Hong Kong. She has broad professional experience gained from working in different teams, including Business Tax Services and International and M&A Tax Services, technical and training. She also has overseas working experience under a secondment program in the USA. Doris has about 20 years of professional experience in tax services. She specializes in Hong Kong and international tax planning. Doris served many multinational clients, especially in the manufacturing, consumer market, shipping industries and funds. Under her current role, Doris focuses on tax technical analysis, research, tax policy consultation, article writing and internal training. She is a frequent speaker in tax seminars, as well as a writer of tax technical articles and publications. Jonathan Culver Partner, International Tax Services, Deloitte Professional experience Jonathan is a Financial Services Tax Partner with a Tax Advisory focus. He is a Hong Kong and International Tax specialist, with significant Asia Pacific experience. Jonathan began his career in London where he specialized in complex tax planning. Jonathan has worked both as an advisor and “in-house” and has spent time at US, UK and Australian investment banks. Jonathan specializes in private equity and principal acquisitions; complex financial instruments; structured finance, leasing and Islamic finance; capital markets, booking methodologies and transfer pricing; group restructurings and profit repatriation; tax efficiency and optimization; and tax controversy and disputes. He regularly assists industry bodies in providing technical feedback to the IRD and in responding to OECD consultation documents.
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Sandy Fung Tax Partner, Alternative Investments, KPMG Qualifications Bachelor of Professional Accountancy, Chinese University of Hong Kong Bachelor of Law, University of London Member, HKICPA Fellow member, ACCA UK Affiliate, CIOT Member, TIHK Fellow member, ICSA UK Fellow member, ICSA Hong Kong Professional experience Sandy is a Tax Partner in KPMG’s Asset Management Group. She has more than 20 years of experience in performing tax advisory and compliance services for financial institutions and MNCs with a particular focus on asset management clients. Sandy was an in-house tax advisor for several global private equity funds. She has substantial experience in implementing the proposed investments, ownership, financing structures and restructuring. She has also been focused on advising the potential tax issues that may arise from the asset management and the exit stages. Sandy provides tax advisory services on investment structures in the Asia Pacific region and cross-border transactions and performs due diligence reviews in connection with M&A transactions. She advises on all aspects of investment structures, including fixed income products, substance requirements, ownership and holding structures, financing arrangements, debt push down strategies and divestment scenarios. Many of the assignments involve the effective use of double tax treaty and consideration of the potential direct, indirect, withholding taxes, capital and stamp duties, etc. Kasheen Grewal Director, Deal Advisory, M&A Tax, KPMG Qualifications Bachelor of Laws (LLB), Victoria University Bachelor of Commerce and Administration, BCA (Corporate Finance; Accounting), Victoria University Chartered Accountant, CA ANZ Barrister and Solicitor of the High Court of New Zealand (Enrolled) Professional experience Kasheen started her career in New Zealand before moving to Hong Kong 7 years ago. Kasheen’s expertise is in large international and regional M&A transactions, including buy-side and sell-side tax due diligence, international tax structuring and post-deal integration. Kasheen mainly works with private equity funds, MNCs, and Hong Kong and PRC-based corporates on cross-border transactions across a range of industries. Kasheen brings in-house commercial experience to KPMG’s M&A tax team having undertaken two client secondments in the telecommunications industry in both New Zealand and Hong Kong, and from working in-house in an M&A and international tax role at Telstra’s international headquarters in Hong Kong for over 3 years. Kasheen brings extensive post-deal and integration experience, having managed the acquisition and international tax integration of a substantial acquisition for Telstra, and brings both regional and international commercial and tax experience from her oversight of international tax matters in Asia and EMEA (Europe, the Middle East and Africa).
Article contributors
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Gwenda Ho Partner, Tax Services, PwC Qualifications Member, HKICPA Member, AICPA Member, TIHK Certified Tax Adviser (Hong Kong) Chartered Global Management Accountant Professional involvements Member, Taxation Faculty Executive Committee, HKICPA Immediate Past President, AWAHK Professional experience Gwenda Ho is a Partner of PwC Hong Kong’s corporate tax practice, leading the technology, media and telecommunications sectors. She has over 20 years of experience in providing Hong Kong and international tax consulting and compliance services to local, regional and multinational clients. She has been actively involved in a number of tax due diligence, corporate restructuring, cross-border tax advisory, transfer pricing, tax investigations, IPO and blockchain / crypto-related projects. Experienced in advising both overseas MNCs and Chinese companies on investing into Hong Kong as well as using Hong Kong as a platform for outbound investment, Gwenda is also active in the startup community. Besides, she has been actively involved in providing comments on latest tax bills, and is a frequent public speaker on tax-related topics. Tracy Ho Partner, Business Tax Services, EY Qualifications Fellow Member, ACCA Associate Member, HKICPA Professional experience Tracy has been a tax partner of 16 years. She was the Asia Pacific Business Tax Services Leader and the Tax Managing Partner of EY Hong Kong and Macau. As the APAC Tax Leader, Tracy drove the relevant tax services growth across 6 Regions – APAC FSO, ASEAN, Greater China, Japan, Korea and Oceania which covers more than 20 countries in relation to Private Client Services, Tax Policy and Controversy, Quantitative Services and Tax Advisory services enabling to provide insightful, multi-country tax advisory services in a connected and consistent manner throughout every stage of the tax life cycle; planning, accounting, compliance and controversy. Tracy is experienced in providing tax consulting advice for conglomerates which are active in inbound and outbound investments activities, cross border supply chain/distribution models and investment structure. Tracy has substantial experience in dealing with tax authorities both Hong Kong and overseas. Her roles on these significant engagements included direct tax planning, advising on the information possibly requested by and assistance in explaining the business models and transactions in question to the tax authorities. She has been voted as one of the “leading tax advisers” in Hong Kong by the Legal Media Group Guide to the World’s Leading Tax Advisers in each edition since 2007. She regularly contributes articles and presents tax seminars on latest tax development and changes.
Article contributors
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Nigel Hobler Partner, Deal Advisory, M&A Tax, KPMG Qualifications Bachelor of Economics, Sydney University Master of Commerce, Sydney University Member, ICAA Professional experience Nigel is a partner in KPMG’s Hong Kong Tax practice. He has over twenty years of experience in advising multinational and local clients on tax advisory and compliance matters having worked in Australia, Indonesia and Hong Kong. Nigel has advised MNC and fund groups to establish their operations and assisted with tax due diligence and structuring their investments. This has involved structuring equity, hybrid and distressed debt investments across various industries and sectors, including infrastructure, real estate, agriculture, technology, financial services, telecommunications, manufacturing, consumer and FinTech. Jane Hui Partner, International Tax and Transaction Services, HK/China China Tax Technical Leader, EY Qualifications Graduate, Chinese University of Hong Kong US Certified Public Accountant Professional experience Jane has over 25 years of experience in PRC tax. Besides being an international tax and transaction services partner, Jane is also the technical leader of EY China Tax practice which provides technical and thought leadership support for the entire tax department in China. Jane’s clients include MNCs, local and offshore permanent establishment firms and PRC corporation. Jane has substantial experience in looking at the tax issues associated with transaction targets with PRC operations in various industries including but not limited to real estate, infrastructure, medical, food and beverage (F&B) and financial services. Jane is familiar with the transaction environment in the PRC and the issues associated with doing deals in China. She has led various engagements on structuring a transactions for both inbound and outbound investments to and from China. Many of these transactions include investing in sizable real estate development projects in multiple locations in China. Jane advises her clients on transaction structure and post-deal restructuring matters; investments in China and other countries in Asia on a regular basis.
Article contributors
79
Tommy Hui Senior Manager, Hong Kong Tax Services, PwC Qualifications Bachelor of Commerce (Hon), University of Toronto US Certified Public Accountant Member, HKICPA Professional experience Tommy Hui is a senior manager in the Tax Practice in Hong Kong with prior experiences in Hong Kong, China and US tax. He has served clients from a wide range of industries where he provided various tax compliance and consulting services. Tommy has been with PwC for more than 10 years advising clients in matters ranging from internal restructuring, amalgamation, divestment, due diligence, etc. Tommy returned from a 2-year secondment in New York within the Industry Service Group where he provided US tax provision and compliance assistance to media and technology companies. Tommy also advised domestic multinationals making inbound investments into the US, including financing and corporate structuring. Kathy Kun Director, National Tax Centre, Tax & Business Advisory Services, EY Qualifications Fellow member, ACCA Professional involvements Examination Panelist, Final Examination of QP program, HKICPA Professional experience Kathy is a Director of the National Tax Centre of EY with over 16 years of experience. She has diverse industry experience including real estate, trading, manufacturing and retailing, banking, insurance, financial services and professional services. In her technical role, she is responsible for developing and updating internal tax training materials, as well as conducting internal tax training courses. She is also a frequent speaker at tax seminars, workshops and is one of the authors of EY’s tax client publications. Winnie Kwan Senior Manager, International and Transaction Tax Services, EY Qualifications Bachelor of Commerce, University of Melbourne Member, CPA Australia Professional experience Winnie has over 9 years of experience in providing corporate tax and business advisory services to a wide range of clients including MNCs, listed groups and privately owned businesses. Winnie has clients from various industries, specializing in technology, media, telecommunication. She has been handling tax compliance and tax advisory tasks such as tax due diligence, group restructuring planning, structuring of intellectual property, operation review, offshore claim exercise, advice on cross-border transactions, tax resident certificate applications and permanent establishment assessment for her clients.
Article contributors
80
Patrick Kwong Executive Director, Tax & Business Advisory, EY Qualifications Bachelor of Business Administration (Hons), Chinese University of Hong Kong Fellow Member, ACCA Associate member, HKICPA Chartered Tax Adviser, TIHK Professional involvements Past president, TIHK Advisor, TIHK Member, JLCT Member, Editorial Board, Asia Pacific Journal of Taxation Professional experience Patrick Kwong has more than 30 years of tax experience advising clients across various industries and sectors. He is now a tax director and a key member of the technical team of the Hong Kong Tax Practice of EY. He advises clients across various industries and sectors including property development and trading, manufacturing and retail, media and telecommunications, banking and financial services, hotel and service industry and professional services. He is a regular speaker at tax seminars and conferences and has authored a number of tax articles published in various professional journals and magazines. Cecilia Lee Partner, Tax Services, Transfer Pricing Services, PwC Qualifications US Certified Public Accountant Professional involvements Member, Taxation Faculty China Tax Sub-committee, HKICPA Professional experience Cecilia has been at PwC for over 20 years, with over 10 years of experience in the United States. She is the head of PwC's transfer pricing practice in Hong Kong and is also the Asia Pacific Champion Partner for PwC's Global Coordinated Documentation service. Cecilia advises clients on various Hong Kong and China transfer pricing issues, including value chain transformation, cost sharing, restructuring, intangible property and audit defence and disputes. Cecilia had been actively involved in the legislation process of the Hong Kong Transfer Pricing legislation. She has successfully assisted in concluding China’s first APA on Cost Sharing Arrangement for a multinational company. She also assisted clients in many planning projects, such as royalty structure planning and implementation. Among other clients, she has successfully assisted in dispute resolution matters with the Chinese Tax Authorities particularly in the area of intangible property transfer and intercompany services. She also advises clients with ongoing transfer pricing disputes with the IRD. Cecilia is a frequent speaker at transfer pricing seminars with clients, professional organizations and tax authorities, and has contributed to professional publications.
Article contributors
81
Alice Leung Partner, Corporate Tax Advisory, KPMG Qualifications Member, HKICPA Professional involvements Chairperson, Taxation Committee, HKGCC Council Member, TIHK Professional experience Alice is a partner with KPMG China who specializes in the corporate tax field for over 20 years. Alice has worked with a diverse range of clients belonging to various industries including consumer markets, industrial markets, transportation, telecommunications and media. Alice has extensive experience in advising multinational and local clients on tax compliance and advisory matters. She has helped many clients in applying tax exemption and resolving disputes, tax audits and investigations initiated by tax authorities. She also managed treaty-related services, including obtaining Tax Resident Certificates, applying double-tax relief on transfer pricing adjustments and negotiating APAs. Alice extensively collaborates with many offices in the KPMG network to assist clients optimize the vast growth and opportunities available in the Greater Bay Area. She is also active in advocating KPMG’s and the business community’s positions and views regarding tax policies and reforms to a number of government agencies, professional associations and industry groups. She is a frequent speaker on various key tax issues and developments in both KPMG and external business seminars and conferences. She also contributes articles to business publications. Ivor Morris Partner, Corporate Tax Advisory, KPMG Qualifications Master Degree in Arts, University of Cambridge Fellow member, ICAEW Professional experience Ivor Morris joined KPMG’s Hong Kong office in 2009 and became a tax partner in 2017. Ivor has extensive experience of advising international clients in Hong Kong on their corporate tax matters. He works with a number of shipping and leasing companies advising on their Hong Kong tax matters, as well as many multinational groups on cross-border related matters.
Article contributors
82
Anthony Pak Partner, Deal Advisory, M&A Tax, KPMG Qualifications Bachelor of Arts (Hons) in Accountancy, City University of Hong Kong Affiliate of Association of Chartered Accountants, United Kingdom Professional experience Anthony is a Partner in KPMG’s Deal Advisory and M&A Tax group. He has more than 20 years’ experience in advising multinational and local clients on tax advisory and compliance matters. Anthony has M&A tax experience across the Asia region, and has worked in Shanghai and Beijing for 10 years and 3 years respectively. Anthony has been involved extensively in Hong Kong profits and individual tax compliance and advisory services prior to his move to Shanghai. Subsequent to his move to Shanghai, he has been involved in dealing with cross-border investment into China and advising foreign real estate companies on their investment strategies and structure to comply with various business and tax regulations in China. Anthony has been specialized in M&A from a PRC tax perspective since 2006. He has engaged in various buy-side tax due diligence in wide range of industries, including real estate, machinery, manufacturing, trading and distribution, retail, pharmaceutical, etc. Anthony has provided a wide range of services to his clients including buy-side and sell-side tax due diligence review, tax structuring and post-deal integration, PRC tax compliance and exit support. Wengee Poon Partner, Tax Services, Transfer Pricing Services, PwC Qualifications Bachelor of Economics and Statistics, University of Rochester Master of Business Administration, University of Rochester Professional experience Wengee Poon is a Partner at PwC Hong Kong specialising in Transfer Pricing Services. With extensive experience in transfer pricing, Wengee has resolved transfer pricing matters for numerous MNCs. Her experience includes assisting clients in determining their transfer pricing structures, formulating transfer pricing policies, preparing transfer pricing documentation and performing post implementation structure maintenance services. Wengee has served a broad spectrum of MNCs in various industries including garments, chemicals, telecommunications, electronics, pharmaceuticals in the manufacturing, distribution and servicing aspects. Wengee is also a speaker at public seminars and has contributed to professional publications.
Article contributors
83
Murray Sarelius National Head of People Services, KPMG Qualifications Member, HKICPA Chartered Accountant, CA ANZ BBS (Accountancy), Massey University Professional experience Murray has more than 20 years of experience with tax issues impacting individuals and businesses operating internationally. Murray advises multinational organisations on matters arising from their mobile workforce, including tax, equity compensation and expatriate policies. Jennifer Shih Tax Director, International and M&A Tax Services, Deloitte Qualifications Member, CPAC Professional experience Jennifer is a Director in the International and M&A Tax Services Group of Deloitte Hong Kong with experience in providing US tax consulting and compliance services to multinational clients. With over 12 years of experience in providing US tax consulting and compliance services to multinational clients, she is well-versed with US inbound tax rules concerning foreign companies doing business and investing in the US. She provides international corporate tax consulting services with respect to US outbound transactions involving controlled foreign corporation (CFC), Passive Foreign Investment Company (PFIC) and etc. She is also experienced in the provision of structuring advice in relation to private equities, hedge funds, and in relation to foreign investment into the US, including investment in US real estates. Jennifer has also been advising a broad range of clients, including foreign financial institutions, with US Qualified Intermediary (QI), FATCA and CRS matters. Paul Smith Manager, Corporate Communications, HKICPA Professional experience Paul is in the Institute’s Corporate Communications Department. His major duties include: • As editorial manager for A Plus, the Institute’s monthly magazine, setting the editorial direction, writing and editing articles; • producing thought leadership surveys and reports; • preparing the Institute’s annual report; and • preparing and editing the Institute’s communications, publications and other media.
Article contributors
84
Johnson Tee Director, Corporate Tax Advisory, KPMG Qualifications Bachelor Degree of Business, Monash University Australia Member, CPA Australia Professional experience Johnson is a Director of KPMG with 16 years of Hong Kong and Malaysian corporate tax experience, specializing in Financial Services. Johnson has a portfolio of clients in different industries including funds, financial services, trading, manufacturing, etc; and he has been working on corporate tax reporting, advising on transactions, regional compliance matters, M&A and restructuring engagements. Johnson has a wide range of experience in the establishment and structuring of offshore funds, advising on operating protocols for funds, assisting clients on application of tax treaty benefits and advising on the structuring of management fees and carried interest. Sharon To Director, International Tax and Transaction Services, EY Qualifications Member, HKICPA Chartered Financial Analyst® Certified Tax Adviser Member, TIHK Professional experience Sharon has more than 10 years of professional experience in tax and business advisory. She provides tax and business advices to FORTUNE Global 500 companies engaged in different industries including real estates, natural resources, hospitality, electronics, jewelry, and procurement etc. Sharon advises on cross border transactions and structuring such as the inbound and outbound investments in the Asia-pacific region, beneficial ownership, indirect transfer and internal reorganization, etc. She also provides Hong Kong and China tax due diligence services. Sharon is also a core member of EY’s China tax policy team.
Article contributors
85
Anita Tsang Director, National Tax Policy Services, PwC Qualifications Fellow member, HKICPA Certified Tax Adviser (Hong Kong) Professional involvements Member, Tax Sub-committee, ACCA HK Council member, TIHK Vice-President, International Tax Committee, TIHK Professional experience Anita has over 15 years of experience in Hong Kong and international taxation. She provided corporate tax and business consulting services to a broad range of local and multinational companies at another big four firm before joining the PwC National Tax Policy Services team. Currently, Anita focuses on providing in-house tax technical support and training at PwC Hong Kong as well as producing the firm’s tax publications. Anita is a regular speaker of professional tax seminars. Fergus Wong Director, National Tax Policy Services, PwC Qualifications Fellow member, HKICPA Fellow member, ACCA Fellow member, CPA Australia Certified Tax Advisor (Hong Kong) Professional involvements Chairman, ACCA HK (2014/15) Member, Global Tax Forum, ACCA Member, ACCA International Council (2013 – 2019) Member, Board of Review of Hong Kong Government, a tax tribunal (for 9 years) Member, Academic Committee, China International Taxation Research Institute (2016) Professional experience Fergus Wong is the Tax Director at PwC Hong Kong. He has more than 30 years of experience in Hong Kong taxation including 4 years in the profits tax and salaries tax units of the IRD. He has been involved in assisting client in handling complicated tax disputes cases with the Hong Kong tax authority including cross-border transactions. Having a strong relationship with the government, both the tax policy bureau and the tax administration, he has been able to provide inputs in the tax policy and practice in Hong Kong. He has many years of experience in Hong Kong tax and international tax gained through working in the IRD and as a faculty member of accounting departments of Hong Kong and Australian tertiary institutions. Before joining PwC Hong Kong, he was with another professional firm providing training and in-house technical support. He is a regular contributor to professional journals and has been involved in setting and reviewing taxation examination papers with various professional.
Article contributors
86
Tiffany Wu Partner, Tax Services, Transfer Pricing Services, PwC Qualifications Bachelor degree in Finance Master degree in Economics Member, HKICPA Professional experience Tiffany is a partner at PwC Hong Kong specialising in transfer pricing. She has specialised in providing transfer pricing services in mainland China and Hong Kong. She has been actively assisting clients in transfer pricing planning, reviewing and evaluating transfer pricing risks, rationalising transfer pricing policies, preparing transfer pricing documentation, providing transfer pricing audit defense support and applying APA and Mutual Agreement Procedure (MAP). Tiffany has served a broad spectrum of MNCs in various industries including Fast Moving Consumer Goods (FMCG), electronics, chemicals, telecommunications, IT, etc. She has assisted in concluding the first Cost Sharing Arrangement (CSA) APA in China for a multinational company. She has also assisted in negotiating Bilateral APAs and MAPs and in handling various TP audit defense cases. Jo-An Yee Technology, Media, Telecommunications Tax Leader – HK Partner, International Tax & Transaction Tax Services, EY Qualifications Fellow Member, HKICPA Professional involvements Member, Taxation Faculty Executive Committee, HKICPA Professional experience Jo An is a Hong Kong tax partner in EY specialising in the technology and telecommunication areas and has over 20 years of practical experience in providing tax advisory and compliance services clients. She is currently the Technology, Media & Telecommunications Tax Leader for Hong Kong/Macau and principal key contact for Asia Pacific technology sector - tax. Jo An has worked on major telecom and technology accounts and has been actively engaged by well-known companies in their fields on their industry-specific tax issues for digital business such as cloud computing, apps, mobile gaming and online marketplace. Jo An was the co-author of several publications. In particular, besides her involvement with CCH and EY for “The Hands of Guide of Tax Compliance in Hong Kong”, her publications include the thought leadership paper published by EY “Talking tax – Telecom transactions in emerging and mature markets” and “Tax considerations in Cloud Computing”.
Article contributors
87
Eugene Yeung Partner, Corporate Tax Advisory, KPMG Qualifications Bachelor of Arts (Hons) in Accountancy Bachelor of Laws (Hons) Master of Law and Accounting Fellow member, ICAEW Member, HKICPA Certified Tax Advisor Professional involvements Convenor, Taxation Faculty Budget Proposals 2021/22 Sub-committee, HKICPA Member, Taxation Faculty Executive Committee, HKICPA Professional experience Eugene is a tax partner of KPMG China. He is based in Hong Kong and experienced in advising on corporate tax issues, deals, tax litigation, regional tax management, etc. Eugene has over 18 years of professional tax experience with a unique mix of exposures. He has spent more than a decade of time with global tax consulting practices in Hong Kong advising local, Chinese and multinational clients on a wide range of corporate tax and company law matters. He has also spent around 5 years with European financial institutions’ Asian tax functions, including a fair amount of time in regional head capacity, leading projects such as setting up tax processes, managing cross-border legal and business restructuring, and handling tax controversies. Eugene is experienced in advising on corporate tax issues, deals, tax litigation, regional tax management, etc. His background and experience enable him to translate complex issues into business implications, and provide pragmatic solutions considering commercial sensitivity. He was named as a leading tax controversy advisor in Hong Kong by International Tax Review and was nominated by Euromoney as a LMG Rising Star. Patrick Yip Vice Chair, Deloitte China Qualifications MPA Degree in Taxation BBA Degree in Accounting (Hons) LL.M (Master of Laws) Degree, University of California at Berkeley Undergraduate Law Degree (Hons), University of Cambridge MBA Degree (Hons), University of Chicago Senior Executive Program for China, Harvard Business School Member, AICPA Member, HKICPA Professional experience Patrick Yip, an experienced international tax partner, is Vice Chair of Deloitte China. He specializes in US international taxation, China-Hong Kong cross-border taxation and structuring M&A transactions. His clients include global and Chinese private equity funds and sovereign funds, and multinational companies in China and the US. He also advises high-net worth individuals on multi-jurisdictional trust and estate planning. In addition, he is a specialist in FATCA and CRS. He was involved in tax policy discussions with both the Hong Kong and Chinese tax authorities. He is fluent in English and Chinese (Cantonese and Mandarin). He won an award in the State of Texas for his CPA exam results. He was named by International Tax Review as a Leading Individual in Tax. Article contributors
88
Abbreviation ACCA
Association of Chartered Certified Accountants
AICPA
American Institute of Certified Public Accountants
AIMA
Alternative Investment Management Association Limited
APA
Advanced Pricing Arrangement
AustCham
Australian Chamber of Commerce
AWAHK
Association of Women Accountants (Hong Kong)
CA ANZ
Chartered Accountants Australia & New Zealand
CIOT
Chartered Institute of Taxation
CPAC
Chartered Professional Accountants of Canada
CRS
Common Reporting Standard
FATCA
Foreign Account Tax Compliance Act
FSDC
Financial Services Development Council
HKGCC
Hong Kong General Chamber of Commerce
HKICPA
Hong Kong Institute of Certified Public Accountants
HKVCA
Hong Kong Venture Capital and Private Equity Association
ICAA
Institute of Chartered Accountants in Australia
ICAEW
Institute of Chartered Accountants in England and Wales
ICSA
Institute of Chartered Secretaries and Administrators
IRD
Hong Kong Inland Revenue Department
JLCT
Joint Liaison Committee on Taxation
M&A
Mergers and Acquisitions
MNC
Multinational corporation
OECD
Organization for Economic Cooperation and Development
TIHK
Taxation Institute of Hong Kong
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Hong Kong Institute of Certified Public Accountants 37th Floor, Wu Chung House 213 Queen’s Road East, Wanchai, Hong Kong Tel: (852) 2287 7228 Fax: (852) 2865 6776 Email: hkicpa@hkicpa.org.hk Website: www.hkicpa.org.hk