This year’s tax sweeteners of the proposed budget sees a return of the Waiver of Business Registration Fees from 1 April 2019 to 31 March 2020 and a one-off reduction of profits tax and salaries tax for the year of assessment 2018/19. Like the years before, the tax payable will be reduced by 75%, subject to a ceiling of HKD20,000 per case. The tax reduction is estimated to benefit 140,000 businesses and 1.91 million individual taxpayers.

Our article series of '10 things to learn about...' heads into the tax season addressing accounting, annual audit and tax compliance.

In today’s social and digital marketing age where influencers, KOL and affiliates drive significant volumes of sales and have therefore become an integral part of a company’s marketing strategy, tax compliance and reporting for engaging companies becomes ever more complex. When a company engages the services of local persons who are not its own employees, such as consultants and freelancers, including social and digital marketing persons, the company has additional tax reporting obligations with regard to payments to those persons. 

A permanent establishment is created by business activity that is sufficient for a corporation to be viewed as having a stable and ongoing presence in a foreign country. If the activity results in revenues in the jurisdiction of the permanent establishment, corporate taxes may be imposed on taxable income of such revenues.  As the term implies, a permanent establishment will be triggered by a company’s activities that reflect ongoing and persistent revenue creation, rather than occasional or isolated business efforts.

Transfer pricing is one of the most important issues in international taxation and thus sits high on the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan. Transfer pricing, among other measures, have been used by multinationals to shift taxable income from high to low tax countries as part of aggressive tax planning schemes. The recent push by the G20 towards international tax cooperation and harmonization initiatives led by the OECD’s BEPS Action aim for greater transparency and promote the ‘substance over form’ principle. 

China’s draft amendments to Individual Income Tax (IIT) law, released for public consultation end of June, sets out significant changes to the current IIT system. Passing of the draft law would broaden the inclusion of non-domiciled individuals as tax residents in China.

The Inland Revenue Department had issued the Employer's Return to Hong Kong based companies for employees salary reporting earlier in April. If a company received an Employer's Return, it is required to file a completed return, even if the company does not, at this point, have any employees. 

The Inland Revenue Department issued profits tax returns for the year of assessment 2017-18 to companies registered in Hong Kong on 3rd April. This year's budget included a proposal for a one-off reduction of 75% of profits tax for 2017-18, subject to a ceiling of $30,000 which will be effective upon enactment of the relevant legislation. The IRD will automatically factor this reduction into the tax assessment.

The Base Erosion and Profit Shifting (BEPS) project addresses gaps in international taxation rules and different tax treatments among jurisdictions. A major issue BEPS aims to tackle is taxation based on the economic activity rather than mere legal structure by harmonizing transfer pricing rules to close taxation gaps and eliminate mismatched arrangements that allow the exploitation by multinationals. This is particularly relevant for hard-to-value intangibles such as Intellectual Property.

Chief Executive Carrie Lam introduced the idea of a two-tiered profits tax regime in her election manifesto. The proposal sees a reduced profits tax rate of 8.25% for the first HKD 2million (USD257,000) profits. Thereafter, the standard rate of 16.5% applies.

Both, the Common Reporting Standard (CRS) and Base Erosion and Profit Shifting (BEPS) Actions, are part of the OECD’s and its member countries’ initiative to achieve greater global tax transparency and justice. Although, CRS and BEPS have different audiences, they are complimentary. BEPS recommends the development and implementation of national Controlled Foreign Corporation (CFC) Rules (Action 3). CFC Rules generally aim to pull the income of overseas corporation with no economic substance under domestic taxation, often including certain deeming provisions that regards attributable income as distributed. The existence of a CFC is frequently linked to tax residence of control and management. Is the Financial Account Information Reporting under CRS disclosing Controlled Foreign Companies/Corporations?

On 7th June 2017, Hong Kong joined the Organisation for Economic Co-operation and Development (OECD) Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Dase Erosion and Profit Shifting (BEPS). The BEPS Project is the brainchild of the OECD and the G20 and is a series of 15 Action Plans aimed at preventing tax avoidance caused by base erosion and profit shifting by multinationals. 

Personal Investment Companies (PICs) that fall within the definition of an Investment Entity are reporting Financial Institutions (FIs) under the OECD’s Common Reporting Standard (CRS). As such, these PICs are subject to the same reporting standards that a bank or other financial institution is. 

Reporting FIs are required to register through IRD's AEOI portal by 3rd October 2017.

The Common Reporting Standard (CRS) reporting date for financial institutions is fast approaching and financial institutions are starting to implement the reporting information collection. This affects existing account holders and persons and companies wishing to open new bank accounts alike who are presented with an additional form to complete. As with FATCA reporting forms, the account holder or applicant is often left with no explanation what the form is for and how it is to be completed. 

The OECD is closing Common Reporting Standard (CRS) loopholes targeting schemes and avoidance products designed to frustrate or circumvent the purpose of CRS. This includes pension schemes and insurance products established to avoid CRS reporting, as well as residence- and citizen-by-investment programs.

The Common Reporting Standard (CRS) and Automatic Exchange of Financial Account Information (AEOI) subject overseas tax residents to the periodical exchange of financial account information to the jurisdiction of their tax residence. Bankers are generally not tax experts, let alone in foreign tax laws, but are increasingly being tasked with the identification of any reportable accounts based on the tax residency of an account holder. Overseas tax authorities, via the exchange of financial account information, may suddenly come into possession of information that is not subject to their jurisdiction.

The Hong Kong government has identified 72 prospective AEOI partners, comprising of all Member States of the EU, Hong Kong's tax treaty partners which have committed to AEOI and other jurisdictions which have expressed interest to the OECD in exchanging information with Hong Kong and is proposing to include these in the list of reportable jurisdictions with effect of July 2017 as prospective AEOI partners. Furthermore, Hong Kong has indicated a possible departure of its initial approach by considering joining the Multilateral Convention on the Mutual Administrative Assistance in Tax Matters.

The redefined approach would result in the IRD storing financial account information collected from financial institutions from July 2017 and exchanging them with these prospective countries once a CAA is in force. The AEOI partner would, regardless of the CAA signing date, then be able to receive financial account information dating back to 2017.