Hong Kong: Changes to Double Tax Relief for Salaries

Insights from Global Mobility

Hong Kong: Changes to double tax r elief for salaries tax

August 7, 2018

In brief The lengthy tax legislation that implements a transfer pricing regime and key actions arising from the Organisation for Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) project in Hong Kong was gazetted as Inland Revenue (Amendment) (No.6) Ordinance 2018 on July 13, 2018. Although the new tax legislation mostly covers the issues on BEPS, it also introduces various changes to salaries tax, in particular, the income exclusion claim under section 8(1A)(c) of the Inland Revenue Ordinance (IRO) as a means for double tax relief.

In detail available where foreign tax has claim from two years to six Changes to income exclusion been paid in a non-DTA years after the end of the claim jurisdiction for services relevant year of assessment; rendered in that jurisdiction. Under the new legislation, a This change applies from year of  imposes an obligation on Hong Kong salaries taxpayer assessment 2018/19. salaries taxpayers to notify who is also subject to foreign tax the Commissioner of Inland for services rendered in a Additional changes Revenue in writing of any foreign jurisdiction having a The new legislation also subsequent adjustment to double tax agreement (DTA) introduces the following with Hong Kong (DTA the amount of foreign tax changes that may impact paid or payable that results jurisdiction) may only claim a salaries taxpayers. The new in the double tax relief tax credit for the foreign tax law: paid under section 50 of the previously granted by Hong IRO and the relevant DTA as a  requires salaries taxpayers to Kong to become excessive relief for double taxation. The take all ‘reasonable steps’ within three months after the income exclusion claim – a under the laws of the adjustment is made; and domestic unilateral measure relevant foreign jurisdiction  applies the transfer pricing that excludes the income for and the relevant DTA (if services rendered outside Hong rules (e.g., the arm’s length applicable) to minimise the Kong of which foreign tax principle for related-party foreign tax payable before similar to the Hong Kong transactions) to the salaries salaries tax has been paid – is making a claim for tax credit tax regime. no longer applicable to such in Hong Kong; case. In other words, the  extends the time limit for income exclusion claim is only making a fresh tax credit

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The takeaway under section 8(1A)(c) will produce a Finally, as the new transfer pricing more favourable tax result and is very rules also apply to determine the The above change to the income often the preferred option for double salaries tax liability of an individual, exclusion claim means that where a tax relief for Hong Kong salaries the IRD is empowered under the new Hong Kong DTA is applicable, a taxpayers. transfer pricing regime to adjust an salaries taxpayer can no longer choose individual's taxable income for between income exclusion claim or tax On the other hand, imposing the salaries tax purpose if it regards the credit claim and has to obtain double foreign tax minimisation requirement remuneration received by the tax relief by means of tax credit. It is for making a tax credit claim individual for his/her services understood that the purpose of the effectively means there is now a legal rendered as not on an arm's length change is to align the approach of basis for not allowing a tax credit in basis. granting double tax relief in a DTA Hong Kong for any voluntary overseas context with the one stated in the taxes paid by taxpayers. In this regard, Companies and individual employees Hong Kong DTAs and as agreed with uncertainties may exist as to what should take note of the above changes the DTA partners, which is by means ‘taking all reasonable steps’ means, in and assess how the changes may of tax credit for all Hong Kong DTAs. particular in situations where the tax impact their current remuneration This may result in more salaries tax authority in the DTA jurisdiction is packages or Hong Kong salaries tax being payable in Hong Kong, as in imposing tax aggressively. positions and what actions may be most cases, an income exclusion claim necessary in response.

Let’s talk For a deeper discussion of how this issue might affect your business, please contact your regular PwC Global Mobility Services engagement team or one of the following team members:

Global Mobility Services – Hong Kong

James Clemence, Asia Leader Robert B Keys Theresa Chan +852 2289 1818 + 852 2289 1872 +852 2289 1887 [email protected] [email protected] [email protected]

Berin Chan Louis Lam Steven Lim +852 2289 5504 +852 2289 5528 +852 2289 3998 [email protected] [email protected] [email protected]

Bruce Lee +852 2289 5510 [email protected]

Global Mobility Services – United States Peter Clarke, Global Leader +1 (646) 471-4743 [email protected]

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This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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