Speech at Council Meeting-Gov. Bills–2nd Read- Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Bill 2023


Deputy President, Hong Kong is favoured by investors from various regions for, among other reasons, its simple tax regime compared with other jurisdictions, and its low tax policy that the SAR Government has always endeavoured to maintain.  Yet, in recent years, Hong Kong has repeatedly and passively carried out tax reforms in response to developments in the international tax landscape, particularly pressure from the European Union (“EU”), which has apparently had some impacts on the local tax regime.

Firstly, Hong Kong has all along adopted the territorial source principle of taxation.  It means that only income sourced from Hong Kong is subject to Hong Kong profits tax, while foreign-sourced income is exempted.  Additionally, income of a capital nature is also exempted from profits tax in Hong Kong.

However, with EU’s inclusion of Hong Kong in its watchlist on tax cooperation in 2021, in order to avoid further blacklisting, Hong Kong amended its tax legislation in late 2022 by enacting the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 (“the FSIE Ordinance”) which took effect on 1 January 2023.  The exemption conditions for foreign-sourced income are no longer as simple as they were.

The FSIE Ordinance stipulates that specified foreign-sourced income, including interest, dividend, disposal gain of equity interests and income derived from the use of intellectual property, received in Hong Kong by multinational enterprise (“MNE”) entities carrying on a business in Hong Kong shall be regarded as Hong Kong-sourced income and are chargeable to profits tax in Hong Kong.  Moreover, a gain derived from a disposal of equity interests arising from the sale of capital assets, if regarded as Hong Kong-sourced income under the foreign-sourced income exemption (“FSIE”) regime, is also chargeable to tax and not exempted.

EU promulgated an updated FSIE Guidance in late 2022, which explicitly includes gains from the disposal of all kinds of property as one of the categories of passive income covered by an FSIE regime.  As such, Hong Kong and other jurisdictions are requested to further amend their legislation for implementation with effect from January 2024.  Although this legislative amendment exercise on taxation is relatively straightforward, it is undeniable that we are being led by the nose by EU.

I noticed that members of the Bills Committee have also expressed concern that if EU updates its guidance from time to time, jurisdictions with ongoing FSIE reforms will be required to constantly amend their regimes to comply with the latest requirements.  Members also hope that the Administration can clarify whether further changes will be needed after this amendment exercise.  Mr CHAN Kin-por, Chairman of the Bills Committee, also raised this point just now.

As the Government has indicated, it is confident that Hong Kong will be removed from EU’s watchlist if the refined regime takes effect from 1 January 2024 as scheduled.  I urge the Administration to closely follow up on the matter and eliminate the hidden risks in Hong Kong’s related tax regime as soon as possible.

The World Competitiveness Yearbook, published by the International Institute for Management Development in Switzerland since 1989, is a widely recognized and highly regarded competitiveness ranking system worldwide.  The report comprehensively evaluates the rankings in four dimensions, namely economic performance, government efficiency, business efficiency and infrastructure, comprising 20 sub‑dimensions.

In the latest edition of the World Competitiveness Yearbook published in June 2023, Hong Kong ranked seventh, recording a continuous decline from its previous top ranking in 2017.  Of course, there are many reasons for that; one of the indicators adopted in the report to assess government efficiency is the performance of tax revenue, which is the main source of income for the SAR Government.  It is believed that the reduction in Hong Kong’s overall tax revenue in 2022-2023 compared to the previous year will continue to affect the ranking.

More importantly, the Organisation for Economic Co-operation and Development (“OECD”), in response to the challenges of base erosion and profit shifting, announced the so-called “Pillar Two” rules on global minimum taxation in late 2021.  The model rules set forth a global minimum effective tax rate of 15% for large MNE groups with a turnover of at least €750 million.  Jurisdictions have announced one after another their implementation timetable for the Pillar Two rules.  For example, the United Kingdom has announced its implementation by the end of this year.  The SAR Government has also indicated in the Budget its plan to implement the corresponding proposal from 2025 onwards.  By then, the global tax competitiveness of Hong Kong may be further weakened.

Therefore, Deputy President, while I support the passage of this Bill, I hope that the Government will closely monitor the potential impacts of the tax reforms requested by EU and OECD on the competitiveness of Hong Kong.  I also suggest that it should consider appropriate policy responses other than tax measures to maintain Hong Kong’s attractiveness to global investors.

I so submit.  Thank you, Deputy President.