Chan Defends Tax Rules For HK Frontier Workers

By Editorial 09 December, 2011

A week after he had confirmed that a change in tax rules for cross-border workers between Hong Kong and Mainland China was not currently under consideration, Hong Kong’s Secretary for Financial Services and the Treasury, Professor K C Chan, has had to reiterate to the Legislative Council that the decision would not be changed.

Firstly, he reaffirmed that, at the meeting with China’s State Administration of Taxation held last month, Hong Kong’s Inland Revenue Department (IRD) had raised the matter of the 183-day threshold. However, both sides considered that the ‘183 days of stay in any tax year’ threshold should not be changed as it is an international standard which has been effectively applied.

In addition, while the threshold coincides with the relevant provisions of the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation (the Arrangement), the ‘days of physical presence’ method is, according to the Commentary of the OECD Model Tax Convention, the only one which is consistent with the wording of the Article on Income from Employment. Other tax jurisdictions, he added, have not made any reservation on this method in the Model Tax Convention.

In Hong Kong's circumstances, it was said that the issue of double taxation for people who work across the boundary in China (including frontier workers) can be only dealt with in accordance with the Arrangement, and the introduction of special tax provisions would lead to double non-taxation of income derived from Hong Kong employment by frontier workers since most of the services are likely rendered outside Hong Kong.

Chan expressed the belief that the Arrangement can reduce the incidence of double taxation that may be encountered by residents of the two sides. Generally speaking, China will only tax Hong Kong residents in respect of their remuneration derived from their work in the Mainland.

Furthermore, according to the Hong Kong government’s understanding, European countries that have special tax provisions for frontier workers include France, Germany, Italy, Belgium and Switzerland. However, those countries levy tax on a worldwide basis, while Hong Kong’s tax system is based on the territorial principle.

Chan confirmed, however, that the government would closely monitor the situation regarding any double taxation issue to ensure the effectiveness of the Arrangement. In that respect, any Hong Kong resident who considers that the tax authorities of one side or both sides have adopted measures leading to taxation not in accordance with the Arrangement can refer the case to IRD for review. If necessary, IRD would discuss the case with China's competent authority.

Tags: Individuals | Expatriates | Compliance | Tax | Tax Compliance | Law | Employees | China | Offshore | Agreements | Legislation | Hong Kong | Individual Income Tax |


News Archive