Speech at Panel on Financial Affairs

Regulation of Qualifying Deferred Annuity Policies

Public education on annuity policies

Mr CHAN Chun-ying sought the latest information on the age and income distributions of annuity policyholders, and enquired about the channels used by the regulators and investor education bodies in disseminating relevant information on annuity products. He further suggested: (a) including anti-deception messages in the public education materials designed for retirees; (b) conducting evaluations on the effectiveness of the current promotion strategies for deferred annuities; and (c) stepping up efforts to educate the younger population on the benefits of deferred annuity products.

The Administration provided the following latest data about QDAPs: (a) average age of annuitants was 47.5; (b) premium payment period ranged from five to 10 years; (c) annuity period ranged from 10 years to whole of life; and (d) minimum age of annuitization ranged from 50 to 80 years old. As regards public education on annuity products, IA advised that it had been disseminating QDAP-related publicity and educational materials through its website, videos, publications and public seminars. An educational website had also been jointly developed by IA and the Investor and Financial Education Council to provide educational information about QDAPs including anti-deception tips. IA would continue to use different channels, such as social media platforms and the radio, to effectively promote public education messages to target clients of QDAPs in different age groups.

Proposed legislative framework to amend the tax arrangements for offshore passive income

Economic substance requirement

Mr CHAN Chun-ying sought details of the economic substance requirement under the refined FSIE regime, including the adequacy test a taxpayer would be required to meet for fulfilling the requirement, and stressed that the Administration should provide quantifiable indicators in the administrative guidance to be issued by the Inland Revenue Department (“IRD”) with a view to enhancing taxpayers’ understanding of the operational details and assisting them in meeting the requirement.

The Administration advised that the economic substance requirement and the source of profits would be considered in separate contexts. The economic substance requirement was an international standard widely adopted in comparable jurisdictions. To meet the economic substance requirement, the taxpayer would need to meet the adequacy test in terms of employing an adequate number of qualified employees and incurring an adequate amount of operating expenditures in Hong Kong in relation to the relevant activities (i.e. substantial economic activities conducted by the taxpayer with regard to the relevant passive income in Hong Kong). For a taxpayer that was a pure equity holding company, a reduced substantial activities test could be applied such that the relevant activities would only include holding and managing the company’s equity participation, and complying with the corporate law filing requirements in Hong Kong. IRD would issue administrative guidance on the refined FSIE regime, setting out the factors that should be considered in analyzing the compliance with the economic substance requirement. Such factors might include the nature of the business, scale of operation, profitability, details of employees employed, the amount and types of operating expenditures incurred, etc.

Possible impacts of the refined foreign source income exemption regime

Mr CHAN Chun-ying enquired about the competitiveness of the refined FSIE regime as compared to that of Singapore and the Administration’s measures to mitigate possible negative impacts of the refined FSIE regime on the tax regime of Hong Kong and the competitiveness of Hong Kong’s business environment.

The Administration advised that the refined FSIE regime was consistent with international standards and comparable with the FSIE regimes put in place by other tax jurisdictions. Given that the proposed refinements to the FSIE regime would only affect MNE groups, the offshore income of standalone local companies with no offshore operation and companies belonging to purely local groups would continue to be exempt from tax.

Consultation with stakeholders

Given the complexity of the proposed refinements to the FSIE regime, Mr CHAN Chun-ying enquired if the Administration would consider extending the one-month consultation period to beyond 15 July 2022 and organizing online briefings for relevant stakeholders to explain the details and gauge their views on the proposed implementation arrangements.

The Administration responded that FSTB issued a consultation paper on 17 June 2022 to business chambers, professional bodies and trade associations to brief them on the legislative proposal of the refined FSIE regime and seek their views on the proposed implementation arrangements. Meanwhile FSTB and IRD also organized and attended several engagement sessions to actively exchange views with stakeholders. The Administration would continue to actively engage stakeholders in the coming months and finalize the legislative proposals and implementation details having regard to the feedback from stakeholders with a view to ensuring smooth implementation of the refined FSIE regime and minimizing the compliance burden for corporates.