Speech at Panel on Financial Affairs

III Proposed refinements to the foreign-sourced income exemption regime

The European Union’s requirements regarding Hong Kong’s foreign-sourced income exemption regime

Members expressed concern that the European Union (“EU”) updated the Guidance on FSIE Regimes (“FSIE Guidance”) from time to time and requested jurisdictions with ongoing FSIE reforms, including Hong Kong, to constantly amend their regimes in compliance with the latest requirements of EU. Members sought details about negotiations with EU on the proposed refined regime; and in the case that the views of stakeholders were not accepted by EU, how the Administration would address the divergence of views.

The Administration responded that it had been the Administration’s stance that if new guidance was formally promulgated or the existing guidance was updated by EU, the Administration would review whether the guidance was to be consistently applied to all relevant jurisdictions for implementation at the same timing, to ensure fair competition between Hong Kong and other jurisdictions. The FSIE regime had been put into implementation in Hong Kong with effect from 1 January 2023. In light of the promulgation of the updated FSIE Guidance by EU in December 2022, the Government had been negotiating with EU on the proposed refinements, and consulting stakeholders on the latest EU requirements to ensure that the legislative proposals could address EU’s requests and stakeholders’ concerns, and avoid the blacklisting of Hong Kong by EU.

Tax competitiveness of Hong Kong

Noting that the proposed refinements to the FSIE regime would mainly affect shell companies set up by multinational enterprise groups in Hong Kong presumably for tax reasons, members enquired about the number of shell companies that might be affected and whether such companies would be relocated out of Hong Kong as a result.

The Administration explained that at present, foreign-sourced disposal gains were generally exempt from profits tax in Hong Kong and hence relevant statistics were not available. The Administration advised that taking the FSIE regime in Singapore as an example, shell companies, which did not carry out any substantial economic activities, would not be regarded as tax residents in Singapore and would not enjoy the various preferential tax measures applicable to tax residents. The Administration envisaged that there would be little incentive for shell companies to move out of Hong Kong for tax reasons after the implementation of the refined regime.

IV Briefing on the work of Hong Kong Monetary Authority

Credit Reference Platform and Cross-Boundary Credit Referencing

Members advised that some small money lenders were discouraged from joining the Credit Reference Platform (“the Platform”) under the Multiple Credit Reference Agencies Model due to cost concerns. Members were concerned that the non-participation of these small lenders might undermine the accuracy of the credit reference provided by the Platform in the long run.

HKMA advised that noting the non-participation of some money lenders in the Platform due to cost concerns, it had requested the Hong Kong Interbank Clearing Limited to design a common set of modules to facilitate money lenders’ connection to the Platform, so as to save the cost of setting up their own connection platforms, and also provided early bird offers to encourage more money lenders to join the Platform. Currently money lenders who had joined the Platform accounted for over 60% of the market share, and it was noted that the Administration would continue to explore other initiatives to encourage more money lenders to join the Platform.

Support for small and medium enterprises and innovation and technology enterprises

In view of the significant decline in the participation rate of eligible enterprises under the Pre-approved Principal Payment Holiday Scheme (“PPPHS”) launched by the HKMA in collaboration with the banking sector, members opined that the Administration should discuss as early as possible with the banking sector and the relevant trade associations on the way forward for the PPPHS such as the exit mechanism after its expiry in July 2023.

HKMA advised that corporates’ uptake for partial principal repayment under PPPHS was increasing steadily. In view of the general stabilization of business conditions of enterprises, HKMA would engage stakeholders on the plan for a gradual wind-up of PPPHS.

roperty Mortgage Loans

Members enquired about the reasons for and implications of the sharp increase in the debt servicing ratio (“DSR”) for residential mortgage loans in March 2023. HKMA advised that the increase in DSR for residential mortgage loans in March 2023 was probably related to the upward adjustment of mortgage interest rates and possibly due to the fact that more property mortgage borrowers were taking out mortgage insurance as well as an increase in the number of Home Ownership Scheme purchases, which had a higher loan-to-value ratio, thus pushing up the overall DSR. But overall speaking, the risks remained controllable.