Accountants ready to advise on new tax treaty

by David Kwong

Guy Ellis, partner, PricewaterhouseCoopers
Photo: CY Leung

Double tax arrangement brings benefits and some uncertainties

Over the last few years, thousands of audit and accounting professionals from Hong Kong have spent a large proportion of their working time in the mainland.

As a result, they have become familiar with the intricacies of China's tax regime and the various regulations applicable for companies and individuals. Now, though, with the signing in August of a comprehensive double tax arrangement between the relevant authorities, they will have something new to consider as from next year.

According to Guy Ellis, a partner at PricewaterhouseCoopers, the main objective is to upgrade the previous arrangement and provide a clearer framework.

"It gives multinationals and Hong Kong companies more certainty about investments in China, but there are still some issues about the application of the treaty," Mr Ellis says.

Three aspects of the new arrangement are attracting particular attention: capital gains, income from employment, and the exchange of information.

The article on capital gains says that if a Hong Kong investor disposes of shares in a mainland company, there will be a full tax exemption in China. However, there are certain provisos. These state that the shares sold must be less than 25 per cent of the entire shareholding of the mainland company and that the assets of the company should not be mainly immoveable property located on the mainland. How this exemption is implemented will initially be a matter for the mainland tax authorities to decide.

"In due course, there may be uncertainties about interpretation," says Mr Ellis. "If that happens, they should ultimately be resolved at the state rather than the local level." He adds, though, since there is no tax on the sale of capital assets in Hong Kong, this change provides a unilateral benefit for Hong Kong investors.

Just take the Big Four accountancy firms, they are probably looking for hundreds if not thousands of people across China

Rolling period

Up to now, individuals whose work took them to the mainland have been well aware of the "183-day rule". An overseas resident spending less than that amount of time in the mainland in the course of a calendar year was not subject to individual income tax in China. The new arrangement will change the basis of counting to a rolling 12-month period.

"This may be more difficult to monitor than the previous fixed period," says Mr Ellis. "We do know, though, that it is primarily up to the individual, rather than the employer, to maintain a record." While the amended rule provides no additional protection from double taxation, he believes it may turn out to be more difficult to manage.

Also under the new arrangement, the Hong Kong and mainland tax authorities will be allowed to exchange information which assists in their tax collection and enforcement activities. Strictly speaking, this should only be information required to implement tax regulations or domestic laws linked to the new arrangement. There is no obligation on either side to supply data not otherwise available in the course of normal business activities, or to disclose any trade or industrial details that might be viewed as commercially sensitive.

Mr Ellis notes that businesses have generally welcomed this approach, which is more restricted than in many other double tax treaties. "Nevertheless, it is likely that both companies and individuals will remain concerned about the exchange of information article until greater clarity is available on how the article will be applied in practice by the mainland and Hong Kong authorities," says Mr Ellis.

Seeking benefits

Overall, he adds, there has been a lot of interest from foreign investors and overseas companies about the implications of the arrangement. Some are even taking it as an opportunity to do a thorough review of their China tax structures. "Businesses are considering whether they can benefit and are looking to see if they can take advantage of the changes," Mr Ellis says.

Considering the possible knock-on effects, he notes that the market for accountants who specialise in tax is somewhat different from audit or other areas of the profession. However, it is no secret that there is a major shortage of qualified junior and middle-management staff, or that people fluent in Cantonese, Mandarin and English are in particular demand.

"If you just take the Big Four accountancy firms, they are probably looking for hundreds if not thousands of people across China," Mr Ellis says. "But the real crunch is being able to find people with the right quality of experience. At present, though, Hong Kong and China are seen as vibrant areas, so many accountants based overseas are now very interested in the opportunities."

Salient points

  • New double tax arrangement signed by the Hong Kong and mainland authorities will come into effect next year
  • Special attention directed to the articles concerning capital gains, income from employment, and the exchange of information
  • Some uncertainties about how various provisions will be interpreted in practice
  • Demand remains high for qualified tax accountants and specialists in other areas

Taken from Career Times 27 October 2006
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