e-Taxation

Because of the inherent undesirability of compromising the simplicity and competence of the Hong Kong tax system, the Inland Revenue Department (IRD) is unlikely to interfere with these underlying principles. The IRD issued a "Departmental Interpretation & Practice Note" (DIPN) in July 2001 that stated the IRD would apply current tax rules to e-Commerce on the same basis as to other forms of business so that no particular business form will have an advantage or a disadvantage from a taxation perspective. The IRD will determine profits tax liability under the above conditions by reference to the manual operations carried out. If a taxpayer failed to observe the treatment advocated in the DIPN, the matter would be brought before the Board of Review or the Hong Kong Courts (Law & Lam, 2001).

Hong Kong is not a party to any income tax treaties, except with China and various agreements relating to transportation income. This lack of a tax-treaty network may make Hong Kong a less favourable jurisdiction for a regional holding company from a taxation perspective. For example, it would be more beneficial to route any investment into Japan through a holding company in Singapore rather than Hong Kong. Dividends paid by the Japanese subsidiary would be subject to Japanese withholding tax of 20% if they were paid to a Hong Kong holding company. On the other hand, dividends paid to a Singapore intermediary entity would be subject to withholding tax of 5%. As the tax rate in Japan is higher than the Singapore tax rate of 25.5%, no additional tax is payable and no taxes should apply on the payment of the dividends from Singapore.

In order to eliminate any competitive advantages currently enjoyed by treaty residents, Hong Kong and China entered into the "Agreement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation on Income" in February 1998. The taxes to which the Agreement applies are:

• individual income tax, foreign investment enterprise income tax and foreign enterprise income tax in China; and
• profits tax, salaries tax and tax charges under personal assessment in Hong Kong.