New deal puts paid to double taxation

The government has claimed a victory for Hong Kong residents and businesses operating in the mainland, signing an agreement with Beijing that will eliminate double taxation and pave the way for more mainland investment through Hong Kong.

The deal, signed in the city Monday by Chief Executive Donald Tsang Yam-kuen and Xie Xuren, the mainland's Minister of the State Administration of Taxation, will cut the top tax rates on direct income, such as operating profits and salary, as well as indirect income, like dividends and interest.

It will also increase cooperation between the two sides to stamp out tax evasion in either jurisdiction.

Tsang hailed the new agreement as another attempt to draw both sides closer together economically, saying the new tax agreement would enhance cross-border financing and the exchange of patent rights between Hong Kong and the mainland.

"These will help promote Hong Kong's economy, enhance our competitiveness and attract overseas capital," Tsang said.

Under the agreement, Hong Kong residents earning money on dividends, interest income and royalties from mainland enterprises will see the top rates on withholding tax - the tax that is automatically deducted before it even goes to the recipient - slashed by about half.

In particular, top withholding tax rates on mainland dividends for Hong Kong residents would fall from 20 percent to 10 percent, and from 10 percent to 5 percent for local businesses with major stakes in a mainland enterprise. The top withholding rates on mainland- based interest income and royalties, meanwhile, would drop to a standard 7 percent. Also, any Hong Kong entity that makes gains on a transfer of shares in a mainland enterprise will see the taxes diverted entirely to the Hong Kong government.

The new agreement stipulates that any other instances of double taxation will be resolved by issuing tax credits to the taxpayer.

Double taxation occurs when a person or company that earns money in two jurisdictions ends up paying both governments for the same income or profits.

All told, the terms of the new agreement will help clarify tax responsibilities and "provide a further level of certainty and stability to potential investors," the government said in a statement. The government also said the measures would attract more overseas investment into the mainland through Hong Kong, while the cutback on royalty taxes would encourage artistic creativity and innovation.

But some raised concern about the exchange of personal information between Hong Kong and mainland taxation authorities, saying investors wary of mainland prying would be more reluctant to pour money into the mainland after Monday's announcement.

That concern aside, most tax experts and business leaders praised the new agreement. "This is a step forward," said Wong Ting-kwong, a pro-Beijing legislator who heads the Hong Kong Chinese Importers' and Exporters' Association.

Wong said some businessmen who frequently shuttled between Hong Kong and the mainland often got caught between the two jurisdictions, leaving them with "the worst of both worlds."

"It was a problem that needed to be resolved, and this agreement highlights the central government's support for the Hong Kong government, and shows that the relationship between them is very close," he said.

Taxation Institute of Hong Kong president Richard Chow Yeung-tuen welcomed the announcement saying it would help taxpayers and the two governments avoid gray areas.

Marcellus Wong Yui-keung, a member of the Taxation Institute and a tax partner at PricewaterhouseCoopers, said the treaty would strengthen the competitiveness of Hong Kong investors and businesses.

"With fewer tax burdens, Hong Kong's financial position will be strengthened," Wong said. He said Hong Kong businesses would benefit from the fact that any capital gain made by transferring shares would not be taxed in Hong Kong, as long as the gain is not an operating profit or sourced in Hong Kong.

Paul Chan Mo-po, president of Hong Kong Institute of Certified Public Accountants, said the deal could make the territory a "springboard" for overseas investment into China.

The Hong Kong General Chamber of Commerce had no comment on the agreement, while the American Chamber of Commerce in Hong Kong was not available for comment.

The new deal, which will take effect when both the sides ratify the agreement, will have no expiry date, and officials said the agreement was meant to be a permanent part of the tax landscape, though either government could request a review of the conditions if any problem arose later.

Hong Kong's commissioner of inland revenue, Alice Lau Mak Yee- ming, emphasized that withholding rates would be lower than those agreed upon in parallel agreements Beijing had made with both Macau and Singapore.

But she conceded that it was hard to estimate how much extra tax revenue the agreement would bring the Hong Kong government, or to predict exactly how many people and businesses would benefit from the agreement.

But she pointed to figures showing that 228,000 Hong Kong residents were working in the mainland in 2004, saying she anticipated that "more and more will work there" as a result of Monday's announcement and other conditions under the Closer Economic Partnership Arrangement.

She also said the new deal would not affect China's World Trade Organization obligations.

Financial Secretary Henry Tang Ying-yen said the new arrangements would allow investors to accurately gauge their tax burdens.