No Tax Rule Change For Hong Kong's Frontier Workers

By Editorial 30 November, 2011

In a written reply to a question in the Legislative Council, the Secretary for Financial Services and the Treasury, Professor K C Chan, confirmed that the Hong Kong and Mainland China tax authorities were not, currently, considering a change in tax rules for cross-boundary workers.

Chan confirmed that, while Hong Kong had raised the suggestion of relaxing the "183 days of stay" threshold with China’s State Administration of Taxation, both parties, after discussions, still consider that it should not be changed as it is an international standard which has been effectively applied. Furthermore, they have taken into account and balanced the tax interests of the resident and the source jurisdictions.

Chan pointed to the relevant provisions of the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation, which apply providing that "the recipient is present in the other side for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable period concerned.”

In addition, according to the Arrangement between the Macao Special Administrative Region and the Mainland of China for the Avoidance of Double Taxation, China and the Macao tax authorities have also adopted the "183 days of stay" as the threshold to determine which party has the taxing right.

The Hong Kong, Macao and Mainland tax authorities have to refer to the "days of stay" and not the "actual working days" in determining a person's tax liabilities in the other side under the Arrangement. This "days of physical presence" method is an interpretation of the provisions under the Arrangements, and is also the method commonly adopted by other tax jurisdictions.

It was also pointed out that a day during any part of which, however brief, the taxpayer is present in a tax jurisdiction counts as a day of presence in that jurisdiction. Hence, a same-day trip or a stay of less than 24 hours by a Hong Kong or Macao citizen in the Mainland is counted as a day of presence.

While some European countries have special tax provisions for frontier workers, under which frontier workers only have to pay tax to the government of their place of residence and not to the government of their place of work, those provisions usually include definitions of frontier cities (for example, the distance from the border) and frontier workers (for example, the frequency of travel between the two countries).

Furthermore, after any change there would be the question of the allocation of financial resources such that the government of the place of residence of the frontier workers has to make financial compensation to the government of the place of work.

Therefore, as Hong Kong's taxation system is based on the territorial principle, and Hong Kong residents' income derived from China is not subject to tax in Hong Kong, Chan concluded that a proposal to introduce special tax provisions for frontier workers would lead to double non-taxation of their income. It would also be difficult to determine the coverage of the exemption area and to define frontier workers on an objective basis.

Tags: Individuals | Expatriates | Compliance | Tax | Double Tax Agreement (DTA) | Tax Compliance | Law | Employees | China | Offshore | Agreements | Contractors | Professionals | Hong Kong | Individual Income Tax |


News Archive