China’s “One Belt One Road” Provides Catalyst for Hong Kong Taxation Reform
According to the China central government’s 13th five-year plan, it has showed its full support for Hong Kong to participate in the nation's "One Belt One Road" development strategy, in which Hong Kong is going to play a bigger role in China's opening up to the rest of the world.
What is “One Belt One Road”?
The Silk Road Economic Belt and the 21st century Maritime Silk Road, also known as “The Belt and Road”. One Belt One Road (OBOR) or the Belt and Road Initiative is a development strategy and framework, proposed by China that focuses on connectivity and cooperation among countries primarily in Eurasia, which consists of two main components, the land-based "Silk Road Economic Belt" (SREB) and oceangoing "Maritime Silk Road" (MSR). The strategy underlines China's push to take a bigger role in global affairs, and its need to export China's production capacity in areas of overproduction such as steel manufacturing.
OBOR was unveiled by Chinese leader Xi Jinping in September and October 2013 in announcements revealing the SREB and MSR, respectively. The coverage area of the initiative is primarily Asia and Europe. However, Oceania is also included as well as East Africa. The Asian Infrastructure Investment Bank (AIIB) and Silk Road Fund are the two major financial institutions involved in OBOR.
What are the countries involved in “One Belt One Road”?
The 65 countries involved in OBOR are listed below.
East Asia: Mongolia, Singapore, Malaysia, Indonesia, Myanmar, Thailand, Laos, Cambodia, Vietnam, Brunei, Philippines
West Asia: Iran, Iraq, Turkey, Syria, Jordan, Lebanon, Israel, Palestine, Saudi Arabia, Yemen, Oman, UAE, Qatar, Kuwait, Bahrain, Greece, Cyprus, Egypt
South Asia: India, Pakistan, Bangladesh, Afghanistan, Sri Lanka, Maldives, Nepal, Bhutan
Middle Asia: Kazakhstan, Uzbekistan, Turkmenistan, Tajikistan, Kyrgyzstan
CIS: Russia, Ukraine, Belarus, Georgia, Azerbaijan, Armenia, Moldova
Mid-East Europe: Poland, Lithuania, Estonia, Latvia, Czech Republic, Slovakia, Hungary, Slovenia, Croatia, Bosnia & Herzegovina, Montenegro, Serbia, Albania, Romania, Bulgaria, Macedonia
Hong Kong’s opportunities in “One Belt One Road”
Hong Kong’s advantages
OBOR is a push to drive cooperation among Eurasian countries along the ancient Silk Road trading route. It would give full play to Hong Kong's unique advantages and enhance its role and function in the China's economic development as well as opening up to the outside world. China central government thinks that Hong Kong had an edge in developing talent and financing, and Hong Kong should make use of these advantages to and coordinate with mainland corporates so as to better develop overseas markets. In the 13th five year plan, Hong Kong is asked by the China central government to speed up cooperation with free-trade pilot zones in Guangdong - Qianhai in Shenzhen, Hengqin in Zhuhai, and Nansha in Guangzhou, and pursue deeper cooperation and exchanges with the mainland.
The role Hong Kong may play
In July 2015, Hong Kong government has made a proposal to the AIIB could establish an office in Hong Kong as disputes handling center (i.e. arbitration center). The AIIB has also showed interest in using Hong Kong as a debt-issuing platform. The AIIB official noted that Hong Kong has many advantages in debt issuing. First of all, Hong Kong is a place with very easy access to global investors. Secondly, Hong Kong has experience in offering Sukuk (i.e. Islamic Bond). Thirdly and most importantly, Hong Kong has a very mature financial market with lower costs for debt issuing. In order to help Hong Kong's companies promote their businesses, Mr. Tsang Chun Wah, the Financial Secretary of Hong Kong, led a delegation to visit countries along the OBOR. The journey has been started from Eastern European countries like Hungary and Poland. They are now planning to visit to those countries in Central Asia and also the countries along the MSR.
Hong Kong’s tax reform in “One Belt One Road”
In August 2015, Hong Kong government said that Hong Kong shall amend its Inland Revenue Ordinance for those provisions relevant to OBOR next year, in order to attract more China and overseas enterprises to set up their corporate treasury center (CTC) and captive insurance company in Hong Kong. Hong Kong government thinks that the local insurance cost is relatively low, which can diversify the enterprises’ risk during their development phase, so it is believed that a lot of enterprises around the world shall be attracted to Hong Kong for such purpose. Recently, Chinese enterprises like CNOOC, CGN and CNPC have already incorporated their captive insurance company in Hong Kong, so as to manage their overseas operation. Such trend shall be continued.
To attract China and overseas enterprises to set up their CTC in Hong Kong, the Hong Kong government has certain tax incentives plan accordingly, which include full tax deductions on interest expenses as well as 50% exemption of profits tax payable related to CTC operation. Singapore did implement similar tax incentive regime to cater for OBOR in 2014. The competition is very fierce between jurisdictions facing such golden opportunities given by OBOR.
In addition, Hong Kong, with 32 comprehensive double tax agreements (CDTA) signed and effective with its trading partners, is eager to extend its CDTA network with those countries along the OBOR, including India, Russia, Romania and Germany, etc.
Hong Kong has plenty of talents in finance, tax, law and language, among other professional services, so it can play a critical role in those negotiations so as to protect national interest and the shared interests of those countries involved.
Given the tax reform by Hong Kong to address for the needs arising from OBOR, it is believed that Hong Kong can be an excellent platform for OBOR economies to raise funds for infrastructure investment. Hong Kong can help in project financing, bridge financing, project management, consulting services and debt issuance. At the same time, Hong Kong should also fight for the opportunities for worldwide financial cooperation presented by the AIIB, the BRICS New Development Bank and the Silk Road Foundation to maintain its position as an international financial center.
ABOUT THE AUTHOR: Catherine Le Bourgeois
Masson de Morfontaine is an international tax and business advisory services firm based in Hong Kong specializes in providing comprehensive professional services for worldwide clients. We are experts helping our clients with practical tax and business advices and keen on advising transfer pricing issues and double tax treaty applications under the scenario of China’s “One Belt One Road” development strategy, strongly supported by our professional network in the Eurasian countries. We are more than welcome to discuss with you about our services.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.