Hong Kong needs to maintain a simple tax system in addition to low tax rates

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Written by: Commentary Editing Room

2021-06-11 18:00

Last update date: 2021-06-11 18:00

Last Saturday (June 5), the finance ministers of the Group of Seven Industrial Countries (G7) and the governors of the Central Bank and the heads of the International Monetary Fund, the World Bank Group, the Euro Group and the Financial Stability Board reached an agreement to deepen multilateral economic cooperation. Strongly support the work of the Group of Twenty (G20) and the Organization for Economic Cooperation and Development (OECD) to address the tax challenges brought about by the digital economy, and promise to accept a global minimum tax rate of at least 15%.

Once the relevant arrangements are implemented, it is expected that Hong Kong's low tax system will be less attractive to foreign companies.

The world's lowest tax rate is one of the G20 and the Organization for Economic Cooperation and Development's policy initiative under the "Tax Base Erosion and Profit Shifting" program, which aims to require multinational companies to pay at least a certain rate of tax in different tax jurisdictions.

Although the nominal corporate profits tax rate in Hong Kong is 16.5%, because the global minimum tax rate is calculated based on the actual effective tax rate, some companies still have a chance to pay less than the 15% proposed in the G7 agreement, not to mention the term "at least ( at least)" 15% only, and it does not rule out a higher tax rate in the final result or subsequent updates.

Multinational companies are afraid of complicated tax assessments

When the OECD conducted a public consultation in December 2019, many multinational companies once emphasized that the “global tax base erosion solution” should adopt simplified measures to reduce the complexity of related rules.

Since multinational companies must use the same effective tax rate calculation method in each tax jurisdiction, they must be worried that this will bring a huge administrative burden; in addition, continue to calculate the tax burden on profits from regions that meet the lowest tax rate. Cause a considerable waste of resources for enterprises and taxation departments.

Regarding the aforementioned issues, one of the OECD recommendations is to set up an advisory group to provide "tax administrative guidelines" to determine which areas are low-risk taxation areas, and allow multinational companies to be automatically deemed to have paid more than the minimum effective tax rate in these areas. , Thus avoiding tedious calculation effort and administrative cost.

If the OECD really introduces simplified measures for the "Tax Administration Guidelines" in the future, the simple tax system that Hong Kong has always pursued will undoubtedly be a great advantage in striving to be included in a low-risk taxation zone.

A simple tax system must start with words

It’s a pity that some measures since this government took office are actually complicating Hong Kong’s tax system. For example, Carrie Lam’s election platform proposed "introducing a two-tier profits tax to reduce the tax burden for enterprises" and "introducing additional tax deductions to encourage Research and Development", by October 2017, the first policy address confirmed that the company’s profit tax rate for the first 2 million yuan will be reduced to 8.25%, and the first 2 million yuan eligible for R&D expenditure will receive a 300% tax deduction, and the balance will receive a 200% tax deduction. It is this kind of arrangement that makes Hong Kong's tax regulations no longer simple and straightforward, and leads to the possibility that the actual effective tax rate of some companies is lower than 15%.

In addition, the OECD also pointed out that the "Administrative Taxation Guidelines" have the opportunity to distinguish different industries at the same time, which means that only certain types of industries are considered low-risk in a certain tax jurisdiction.

At present, the Hong Kong government has reduced tax rates on the taxable profits of certain industries such as aircraft leasing and ship operations in an attempt to assist the development of these industries in Hong Kong. The relevant measures should also be affected by the "Administrative Tax Guidelines" in the future.

This also means that if the Hong Kong Government still supports certain industries in the future, it may not be able to do it directly with tax relief, and it will have to devote more effort to other methods.

The lowest global tax rate will certainly weaken the competitiveness of Hong Kong's low tax rate environment in the long run, but the "simple tax system" that is often referred to as it is another matter.

If the Hong Kong government can stand by its word and act to maintain a simple tax system in Hong Kong, so that the actual effective tax rate for companies paying taxes in Hong Kong can be truly close to the nominal 16.5% level, this may instead attract more companies to choose to stay in Hong Kong, but the premise must be ours. As one place pursues a simple tax system, instead of allowing the principal officials to chant this slogan while adding various measures to complicate the tax system under different names on the other side.

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