e-Taxation

Hong Kong

Hong Kong has not adopted any tax regulations specifically aimed at taxing electronic transactions. There is a withholding tax that applies to royalties and license fees. The current withholding tax rate is 1.65%. The growth of e-Commerce may produce opportunities for Hong Kong as many e-Commerce operators can use Hong Kong as a regional finance and administration center which offers excellent infrastructure for international business support. As business transactions can be performed through a web site anywhere in the world, it is difficult to determine the location where the profit is sourced or the place where the service is performed. The established principles on the source of profits may be challenged by the new practices made prevalent by e-Commerce.

In Hong Kong, whilst the tax authority is keeping an eye on how other countries are taxing e-Commerce, the application of the territorial concept to e-Commerce remains a contentious issue. The guiding principle should still be that one looks to see what the taxpayer has done to earn the profits in question and where he has done it. In relation to trading through the Internet, the tax authority's position continues to be that the profit is located where the contracts for purchase and sale are effected. The tax authority will also look at the totality of facts in determining what the taxpayer did to earn the profits (Law, 2001).

Hong Kong's tax regime has traditionally been, and continues to be, relatively uncomplicated. Customs duty is chargeable on selected items but there is no value added tax, consumption tax, turnover tax or any other type of indirect tax on sales of goods or services in Hong Kong (Law & Lam, 2001). Hong Kong, consistent with its general "level playing field" tax policy, has not introduced any specific tax incentives for Internet companies, presumably instead choosing to rely on the inherent tax attractiveness of a comparatively low tax rate, its simple territorial - based tax system and generous capital allowances for computer hardware (Farrell & Yuen, 2000).