Recent Tax Legislation Enacted to Implement Certain Profits Tax and Stamp Duty Amendments
Recent tax legislation enacted to implement certain profits tax and stamp duty amendments
June 18, 2021 Issue 5
In brief
The Inland Revenue (Amendment) (Miscellaneous Provisions) Ordinance 2021 (the IR Amendment Ordinance) and the Revenue (Stamp Duty) Ordinance 2021 (the SD Amendment Ordinance) were gazetted on June 11, 20211.
The IR Amendment Ordinance (1) specifies the profits tax treatments of corporate amalgamations in Hong Kong, (2) sets out the revised deduction rules for foreign taxes paid for profits tax purposes and (3) enhances the statutory framework for furnishing of tax returns to pave the way for e-filing of profits tax returns. The changes related to (1) above apply to corporate amalgamations taking effect on or after June 11, 2021 whereas the revised deduction rules in (2) above apply from year of assessment 2021/22.
The SD Amendment Ordinance raises the stamp duty rate on transfer of Hong Kong stock from 0.1% to 0.13% for each of the buyer and seller effective from 1 August 2021.
In detail Inland Revenue (Amendment) (Miscellaneous Provisions) Ordinance 2021
This News Flash discusses the views and clarifications of the government on some key issues raised during the legislative process of the IR Amendment Ordinance. For a detailed discussion of the key provisions of the ordinance, please refer to our three Hong Kong Tax News Flashes issued in March and April 20212.
Special tax treatments of corporate amalgamations
• The government considers that the various conditions (i.e. the same trade condition, the post-entry condition and the financial resources condition) for utilising the pre-amalgamation losses under the special tax treatments are necessary to prevent the transfer of losses between group companies (i.e. group tax loss relief) through amalgamation and the acquisition of loss-making companies followed by an amalgamation to reduce tax liabilities.
• In determining whether there are good commercial reasons for carrying out a qualifying amalgamation and whether a main purpose for avoidance of tax exists, the Commissioner of Inland Revenue will consider all relevant facts and circumstances, such as the reasons for the amalgamation, the results that are intended to be achieved or have been achieved by the amalgamation, the non-tax purposes of the amalgamation, whether there are alternative ways to achieve the non-tax purposes, and the functions, assets and risks of each entity involved in the amalgamation, etc.
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• The government considers it is not appropriate for the special tax treatments to apply to merger of two Hong Kong branches pursuant to a merger of two foreign companies because the merger laws of different jurisdictions may be different and some foreign mergers may involve non-wholly owned companies.
• The Inland Revenue Department (IRD) will issue a Departmental Interpretation and Practice Note to provide further clarifications and guidelines on interpreting and applying the special tax treatments. In particular, the IRD will set out examples demonstrating how the conditions for utilising the pre-amalgamation losses of amalgamating company and amalgamated company apply in practice.
• While the IR Amendment Ordinance does not address stamp duty issues, the government clarified that when an amalgamated company succeeds to the Hong Kong stocks or immovable properties of an amalgamating company, no stamp duty is payable as the succession is by operation of law and does not involve any instrument chargeable to stamp duty.
Revised rules for foreign tax deduction
• For foreign withholding tax paid on an income by a Hong Kong resident person in a treaty jurisdiction, double tax relief is only available by means of a tax credit under section 50 of the Inland Revenue Ordinance (IRO) if the same income is subject to profits tax in Hong Kong. No deduction is allowed in such scenario. The revised rules allow deduction for (1) foreign income taxes paid by a Hong Kong resident in a non-treaty jurisdiction and (2) foreign income taxes paid by a non- Hong Kong resident in any foreign jurisdictions when the same income is subject to profits tax in Hong Kong and no tax credit is available under section 50.
• The government clarified that whether foreign income taxes charged on deemed profits are deductible would depend on the basis of computation. Subject to fulfilment of other specified conditions, foreign income taxes on deemed profits should be deductible if they are charged based on turnover. In this regard, our understanding is foreign income taxes that are charged on a deemed percentage of the turnover without allowing for any deduction of outgoings and expenses can be deductible under the revised rules.
Statutory framework for furnishing of tax returns
• E-filing of profits tax returns will first be rolled out on a voluntary basis, with the ultimate goal of implementing mandatory e- filing by phases. For mandatary e-filing, the IRD’s preliminary plan is to first require large businesses (e.g. with turnover above a certain threshold) or businesses in certain sectors (e.g. financial institutions) to file their tax returns electronically. It may then be gradually extended to other classes of businesses/entities. The IRD may consider exempting mi cro-enterprises (e.g. with turnover below a certain threshold) from the mandatory e-filing requirement.
• The IR Amendment Ordinance defines a “service provider” as “a person engaged to carry out a taxpayer’s obligation under section 51(1) of the IRO”, namely the obligation of furnishing returns. In this regard, the government clarified that by defining the role of service provider as "furnishing returns", it is intended to refer only to the act of signing the return, irrespective of the way in which a return is furnished (i.e. paper, electronic or mixed). Accordingly, a person engaged by a taxpayer solely for carrying out preparatory work (such as preparing profits tax computations and other supporting document, filling in the return form, etc.) is not a “service provider” in this context.
Revenue (Stamp Duty) Ordinance 2021
The SD Amendment Ordinance gives effect to the proposal in the 2021/22 Hong Kong Budget to increase the stamp duty rate on transfer of Hong Kong stock. Effective from August 1, 2021, the stamp duty rate on transfer of Hong Kong stock will be increased from 0.1% to 0.13% of the consideration or value of each transaction payable by buyers and sellers respectively.
The takeaway
The above clarifications provided by the government shed light on the IRD’s stance on various issues arising from the IR Amendment Ordinance. Groups contemplating a corporate amalgamation in Hong Kong should take note of the special tax treatments and the conditions for utilising any pre-amalgamation losses. Companies that have paid foreign taxes overseas should assess whether they are eligible for a profits tax deduction of the foreign taxes paid under the revised rules if they are not eligible for a tax credit claim.
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Endnotes
1. The ordinances can be accessed via these links: https://www.gld.gov.hk/egazette/pdf/20212523/es12021252318.pdf https://www.gld.gov.hk/egazette/pdf/20212523/es12021252316.pdf
2. The news flashes can be accessed via these links: https://www.pwchk.com/en/hk-tax-news/2021q1/hongkongtax-news-mar2021-2.pdf https://www.pwchk.com/en/hk-tax-news/2021q2/hongkongtax-news-apr2021-3.pdf https://www.pwchk.com/en/hk-tax-news/2021q2/hongkongtax-news-apr2021-4.pdf
Let’s talk For a deeper discussion of how this impacts your business, please contact:
PwC’s Corporate Tax Leaders based in Hong Kong
Charles Lee Jeremy Ngai Jeremy Choi +852 2289 8899 +852 2289 5616 +852 2289 3608 [email protected] [email protected] [email protected]
Rex Ho Cecilia Lee Jenny Tsao +852 2289 3026 +852 2289 5690 +852 2289 3617 [email protected] [email protected] [email protected]
Kenneth Wong +852 2289 3822 [email protected]
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In the context of this News Flash, China, Mainland China or the PRC refers to the People’s Republic of China but excludes Hon g Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region. The information contained in this publication is for general guidance on matters of interest only and is not meant to be comp rehensive. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to you r circumstances from your usual PwC’s client service team or your other tax advisers. The materials contained in this publication were assembled on June 18, 2021 and were based on the law enforceable and information available at that time. This News Flash is issued by the PwC’s National Tax Policy Services in Mainland China and Hong Kong, which comprises of a team of experienced professionals dedicated to monitoring, studying and analysing the existing and evolving policies in taxation and other business regulations in China, Hong Kong, Singapore and Taiwan. They support the PwC’s partners and staff in their provision of quality professional services to businesses and maintain thought-leadership by sharing knowledge with the relevant tax and other regulatory authorities, academies, business communities, professionals and other interested parties. For more information, please contact: Long Ma +86 (10) 6533 3103 [email protected] Please visit PwC’s websites at http://www.pwccn.com (China Home) or http://www.pwchk.com (Hong Kong Home) for practical insights and professiona l solutions to current and emerging business issues.
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