This photo dated Oct 28, 2014 shows the Central Government Offices at Tamar, Hong Kong. (PHOTO/HKSAR GOVERNMENT)
HONG KONG – The Hong Kong Special Administrative Region’s government said it would request the European Union to swiftly remove Hong Kong from the watch list on tax cooperation after amending the relevant tax arrangements.
The EU on Tuesday announced the inclusion of Hong Kong in its watch list on tax cooperation as it considered that the non-taxation of certain foreign-sourced passive income in Hong Kong might lead to situations of "double non-taxation".
In a statement issued on the same day, a spokesperson for the HKSAR government noted that Hong Kong has, over the years, adopted the territorial source principle of taxation, whereby offshore profits are generally not subject to profits tax in Hong Kong.
“As an international financial center, Hong Kong has all along been actively participating in and supportive of international tax cooperation,” the spokesperson added.
READ MORE: Finance chief: Hong Kong to maintain simple tax system
“The EU is concerned that corporates with no substantial economic activity in Hong Kong are not subject to tax in respect of certain offshore passive income (such as interest and royalties), hence leading to circumstances of ‘double non-taxation’,” the spokesperson said.
An HKSAR government spokesperson stressed that Hong Kong enterprises will not be subject to defensive tax measures imposed by the EU as a result of being included in the watch list on tax cooperation
Under the premise of supporting the combating of cross-border tax evasion, the HKSAR government said it has agreed to cooperate with the EU to amend the Inland Revenue Ordinance (Chapter 112 of the Hong Kong laws) by the end of 2022 and implement relevant measures in 2023, the spokesperson said.
“The proposed legislative amendments will merely target corporations, particularly those with no substantial economic activity in Hong Kong, that make use of passive income to evade tax across a border,” the spokesperson said, adding that individual taxpayers would not be affected.
“As to financial institutions, their offshore interest income is already subject to profits tax under the Inland Revenue Ordinance at present, and hence the legislative amendments will not increase their tax burden,” the spokesperson said.
The spokesperson stressed that Hong Kong enterprises will not be subject to defensive tax measures imposed by the EU as a result of being included in the watch list on tax cooperation, adding that Hong Kong will continue to adopt the territorial source principle of taxation.
ALSO READ: HK signs tax pact with Georgia to avoid double taxation
“The government will endeavor to uphold our simple, certain and low-tax regime with a view to maintaining the competitiveness of Hong Kong's business environment.”
The government will consult the stakeholders on the specific contents of the legislative amendments to minimize the compliance burden of corporates, according to the spokesperson.
The EU published the guidance on the foreign-sourced income exemption regime in October 2019 and commenced corresponding assessment on the tax arrangements of a number of tax jurisdictions, including Hong Kong).
The focus of the assessment is to address situations where offshore shell companies obtain tax benefits through "double non-taxation".