The 1980s was the era of the joint venture, the 1990s a period of nervousness ahead of the handover; the present day is a time of interaction between Hong Kong and the PRC. The territorial system makes Hong Kong a tax-favourable place for international business. Hong Kong is a gateway for investment both into and out of the PRC. It has no capital gains tax, no dividend withholding tax and no estate duty. Profits of Hong Kong companies are exempt surplus for Canadian purposes. Offshore profits are not taxed, but the Inland Revenue examines each case critically. Moving business into China can be profitable. It needs to be done promptly, with minimal risk and with minimal tax. Most major retail chains have a buying office in Hong Kong. Some of the profit will remain in Hong Kong and may be tax-free or taxed at 16.5%. Hong Kongs attraction as a base for investment in the PRC is its certainty of law and practice: a PRC manufacturing company may be a wholly-owned subsidiary of the Hong Kong company, doing its banking in Hong Kong. Hong Kong may also be the base for a representative office or a wholly owned foreign enterprise (WFOE) in the PRC. The age of Mr Fix-it in the PRC is over. The PRC has whistle-blowing legislation.
Double non-taxation can occur without tax treaties e.g. under territorial systems or in zero-tax jurisdictions. It requires an absence of tax in the source country e.g. on a bank deposit (outside Hong Kong or Singapore) , US bonds (corporate or government), growth companies paying no dividends, dividends from the UK and Australia. Treaty shopping is under attack in many countries: the US limitation on benefits article has become more complicated; German law now effectively prevents treaty shopping by individuals and privately-held companies. Belgium and Italy have anti-shopping rules. Most developed countries do not generally conclude treaties with zero-tax companies. The UAE is an exception: it taxes only banks and petro-chemical companies. The definition of resident in the UAE treaties is not always the same. THE UAE/New Zealand treaty merely requires the UAE claimant to be resident for UAE purposes. Others require the claimant to be liable to tax. The OECD Commentary says this extends to a person who would be liable for tax if there were any. Revenue Canada says the claimant must be subject to the taxing jurisdiction, whether or not his income is actually taxed but excluding treaty shopping cases or the residence of convenience. A treaty is to be interpreted by the country giving the tax relief, so resident may be construed differently in different countries. A beneficial owner will normally be paying tax in his own country, but this is not true of the UAE. The New Zealand Legislature commented on the UAE treaty: it seems that the attraction of the treaty is that it should bring in investment from the UAE. There are UAE treaties with China, India, Indonesia, Korea, Malaysia, New Zealand, Pakistan, Singapore and Thailand. There is a limitation on benefits article in the treaty with Korea. The treaties between China and Hong Kong and Singapore may give rise to double non-taxation. Non-resident Indians have used Mauritius and other countries to invest in India without liability to capital gains tax. Several Malaysian treaties now exclude Labuan entities from benefit.
The Hong Kong system is stable and changes little. The rates are to be reduced next year to remain competitive with Singapore. The system is territorial, and much tax litigation has turned on the location of the source of profits notably in Kim Eng Securities, a disappointing case, and ING Baring Securities, where the effective cause of the profits was held to be the overseas transactions and the profits accordingly had an overseas source. A statement of practice by the Inland Revenue Department is expected shortly. The source of employment income is determined by reference to the residence of the employer and the totality of the facts: the position is uncertain, despite a new practice note. Hong Kongs GAAR is to be found in s.61A. It applies where the sole or dominant purpose is the avoidance of tax. Tai Hing Cotton Mill is a property development case: profit was shifted from the trading account of the subsidiary; to become a capital gain of the parent; HIT Finance/HK International Terminals awaits decision. A double tax arrangement with the PRC gives favourable withholding tax rates and other advantages.
At one extreme are Dubai and Seychelles, with no personal income tax, and at the other Australia, New Zealand and South Africa, with very serious tax regimes. The retiree can expect freedom from tax in the countries with territorial systems Hong Kong, Malaysia and Singapore. Mauritius taxes foreign income on the remittance basis, and a kind of remittance basis applies to Thailand also. Some retirees succeed in being resident nowhere, but most require some pre-immigration planning, before becoming resident elsewhere. Several countries have an emigration tax of some kind, which may be minimised by income postponement and asset devaluation. The retiree with no domestic tax liabilities may nevertheless suffer tax in the countries in which his income arises. This may be minimised by treaty shopping, which has become more difficult since the Indofood decision, but tax-favoured trusts and insurance policies can still be effective.
The Special Economic Zones were blessed in Deng Xiao Pengs 1992 speech. Shenzen and Pudong have been hugely successful zones. Binhai New Area is the new zone. It is to be a gateway for the development of north China. It is close to, but independent from Beijing. It affords a 15% tax rate (as opposed to the general 25%). Insurance, banking and finance are encouraged: this will lead to individuals having unlimited access to the Hong Kong stock market. The next zone will be in Chongquing-Chengdu, to develop the South-west: the zone has a population of 80 million and serves as a gateway to 300 million in the region. New zones legal and illegal will undoubtedly develop in the future. Every new business in China should obtain a VAT and transfer-pricing advance ruling. VAT export rebates are not permanent. Social security costs are bound to increase. A new tax regime comes into effect in 2008. There will be benefits for high-tech companies and venture capital enterprises investing in them.
Indias economic growth at 9.2% a year is mainly in the south-west and around Delhi. Mauritius is the most significant investor. Domestic companies pay tax at 33.99%, with a dividend tax of 16.995%, though there are many tax breaks. Profits earned and fully distributed leave 49.31%. Debt can reduce the tax charge, but some convertible debentures are treated as equity; there are many restrictions and outgoing interest is taxed, but the use of Cyprus can reduce the rate to 10%. Long-term capital gains on publicly-traded stock are not taxed. Credit for Indian tax may not be available in the US. Mauritius, Singapore, the Netherlands and possibly Cyprus may be used for inward investment. The UAE has also been used, sometimes successfully. Many outgoing payments suffer withholding tax, but there is an advance rulings system. Decisions of the Supreme Court have been helpful in construing tax treaties. There are tax holidays for special economic zones and technology industries. Venture capital funds have become popular, making use of Mauritius or other treaty countries.
There is no tax on outgoing dividends and no capital gains tax. The tax treaties are still few, but dividends from Belgium and Luxembourg suffer no withholding tax. Bank deposit interest is not taxed, nor is interest sourced abroad but the IRD is becoming stricter. Hong Kong does not give any tax credit for foreign tax; but only a deduction for foreign withholding taxes. Royalties have a Hong Kong source if transactions are arranged there, and intellectual property cannot be amortised; there is a small withholding tax on outgoing royalties. Profits from trading in securities listed abroad have a foreign source; this may not be so with other securities. The Inland Revenue Department now scrutinises more closely re-invoicing operations: a practice note sets out transactions which will be treated as not giving rise to a tax liability, but care is still needed. Hong Kong is competitive, but the effective tax burden in Singapore is lower. The Income Tax Ordinance is short and leaves a large area for interpretation and judicial decisions. There are no new tax-free companies in Macau. Malaysia has the capacity to be a competitor. The first tax treaty was with China. This has been followed by treaties with Belgium, Thailand and Luxembourg and negotiations with other countries. Exchange of information is presently the stumbling block. The IRD does not see encouragement of business as its job. The costs of litigation are high. Unlike Singapore, Hong Kong does not offer targeted tax incentives; this may change. The individual living on income from foreign investment pays no income tax. Trust administration and private wealth management grew in the 80s and 90s and the trust law and the trust law and company law are to be modernised, but the treatment of trusts and offshore companies is uncertain. These are areas in which Singapore has forged ahead, but Government is reviewing the situation and reforms are hopefully in the pipeline.
The trustee is the legal owner of accumulated income and is taxable accordingly. Special treatment may be accorded where the settlor is non-resident and the income arises abroad. In New Zealand, the income is exempt. Some people argue that it may nevertheless benefit from a double taxation agreement e.g. on interest, dividends and royalties provided the trustee is resident and the beneficial owner of the income. The deciding law is that of the source country. Is the trustee a resident? The OECD model does not address the issue. Some foreign-source income is going to be taxable: therefore, it is argued, that the trustee is just one person and must therefore be regarded as resident. Unlike the OECD model, the US model in effect divides the trustee into separate persons, depending on whether particular streams of income are taxed or not. The OECD Commentary says that a narrow technical sense is not to be given to the meaning of beneficial owner. Arguably the effect is that for DTA purposes beneficial ownership does not have its common-law meaning, but instead a broader meaning that applies for the purposes of international fiscal law. A trustee has the right to control and deal with the trust income, and it appears that trustees are, as a matter of policy, entitled to benefit; this view is supported by the French text. The expression has been examined in Indofood, where it was said that a mere conduit is not a beneficial owner. A trustee may be distinguished, but this might be a risky argument. For capital gains, however, a trustee can certainly be an alienator; there is no beneficial ownership requirement. Establishing a New Zealand foreign trust requires few formalities: the Inland Revenue Department must be notified; the trustee must maintain financial records; if the settlor is Australian, the trustee must advise the IRD, which shares the information with the Australian Tax Office.
China is not merely a sourcing centre; its domestic market is important. |Its tax code is short: many details are left to local officials. China now has more than 90 treaties. There is presently no withholding tax, but a 20% or 10% rate is expected. Reduced rates apply under the treaties with Hong Kong and Singapore. It is possible to change the holding company before the end of the accounting period. Barbados currently has the most favourable treaty for capital gains, but this is not expected to survive. Some provisions in the law are not invoked e.g. the concept of management and control, or that of the permanent establishment, but they may be invoked in the future. The tax authorities are becoming more aggressive. Taxes are collected on a local basis, and different districts behave in different ways. The first interpretation of a treaty to be made by China is in relation to the treaty with Hong Kong; it is to apply to other treaties with similar wording. Tax disputes are not generally taken to the Court in China. An individual who applies for a residence permit is treated as tax-resident. A resident must disclose his world-wide income, even though he may actually pay tax only on his local income. Much is changing very fast.