Hong Kong Taxation: Law and Practice 2012–13 Edition

11. International Aspects of Hong Kong Taxation

Chapter 11 ■ International Aspects of Hong Kong Taxation 11.1 Introduction 748 11.2 General Principles of International Taxation 748 11.2.1 Residence and source as a basis for taxation 749 11.2.2 Double taxation 750 11.2.3 Relief from double taxation 751 11.2.4 Double taxation agreements — general 754 11.2.5 Structure of double taxation agreements 755 11.2.6 Overview of key provisions of double taxation agreements 757 11.2.6.1 Resolving residence-residence conflicts 757 11.2.6.2 Resolving source-source conflicts 758 11.2.6.3 Permanent establishments 759 11.2.6.4 Dividends 761 11.2.6.5 Interest 762 11.2.6.6 Royalties 762 11.2.6.7 Employment income 763 11.2.6.8 Associated enterprises 763 11.2.6.9 Double tax relief 764 11.2.6.10 Non-discrimination 765 11.2.6.11 Mutual agreement procedure 766 11.2.6.12 Exchange of information 766 746 Hong Kong Taxation 11.2.6.13 Mutual assistance in collection of taxes 770 11.2.6.14 Other articles 771 11.2.7 Anti-avoidance in an international context 771 11.2.7.1 Transfer pricing 771 11.2.7.2 Controlled Foreign Corporation (CFC) rules 777 11.2.7.3 Thin capitalisation rules 780 11.2.7.4 Treaty shopping 782 11.3 International Tax Aspects of Inbound Investment 783 11.3.1 Carrying on business and permanent establishments 784 11.3.2 Determination of assessable profits 784 11.3.3 Double tax relief 785 11.3.4 Financing an investment in Hong Kong 787 11.3.5 Branch vs subsidiary 787 11.3.6 Transfer pricing 789 11.4 International Tax Aspects of Outbound Investment 791 11.4.1 Assessability of foreign profits 791 11.4.2 Unilateral double tax relief 793 11.4.3 Bilateral double tax relief 795 11.4.4 Withholding taxes 797 11.4.5 Financing a foreign investment 799 11.4.6 Hong Kong expenses relating to foreign investment 800 11.4.7 Transfer pricing 801 Chapter 11 International Aspects of Hong Kong Taxation 747 11.5 Hong Kong Taxation Issues for Mainland Investors into Hong Kong 801 11.5.1 Choice of investment vehicle 802 11.5.2 Comprehensive double taxation agreements 802 11.5.3 Residence 803 11.5.4 Carrying on a business and the existence of a permanent establishment 805 11.5.5 Determination of assessable profits 805 11.5.6 Other methods of computing profits 807 11.5.7 Personal Taxation 808 748 Hong Kong Taxation 11.1 Introduction This book is predominantly concerned with the law and practice regarding taxes imposed by the laws of Hong Kong. Hong Kong is not, however, isolated from the rest of the world in terms of foreign trade and investment . Accordingly, this chapter examines some international aspects of taxation to highlight various issues faced by overseas enterprises investing in Hong Kong and Hong Kong enterprises investing abroad. In particular, this chapter looks at some common features of tax systems around the world and how these may give rise to double taxation in relation to cross border transactions and the means by which such double taxation may be avoided or mitigated. But cross border transactions or foreign investment can present tax planning opportunities and this chapter also discusses some anti-avoidance provisions commonly found in domestic tax legislation which aim to counter such tax planning opportunities . Having looked at these issues in general terms, the chapter then considers some of the common tax issues which arise in the context of investment into, and out of, Hong Kong. The material covered in this chapter is often loosely referred to as “international tax.” It is important to remember, however, that taxation is fundamentally a domestic issue as it is imposed by jurisdictions on the basis of their sovereign right to tax residents of, or economic activity occurring within, the jurisdiction. In other words, there are no true “international” taxes, notwithstanding the existence of DTAs between countries and moves to harmonise the tax systems of certain regions, most notably the European Union. As such, the term “international tax” really only refers to how a domestic tax system impacts on a transaction which has international elements. Nonetheless, the lack of consistency between domestic jurisdictions can bring about potentially onerous consequences for certain businesses or transactions and the role of...