Hong Kong must come up with a strategy to respond to a recent proposal by the Organization for Economic Cooperation and Development to impose a global minimum tax rate on multinational companies that will severely hamper the competitiveness of the SAR’s low and simple tax regime, said audit advisory firm PricewaterhouseCoopers.
By levying such a tax rate, the plan aims to eliminate the huge advantages some multinational enterprises enjoy by shifting their operations to low-tax regimes and hence minimizing the taxes they would otherwise be paying.
We urge the government to conduct a comprehensive review of Hong Kong’s tax system to make it relevant and competitive in the fast-changing international landscape. Equally important is a regular review and enhancement of existing tax incentives to make sure they’re effective and attractive
Kenneth Wong, PwC Hong Kong Tax partner
Under the proposal, if the tax paid by a multinational corporation in Hong Kong is lower than the new global minimum tax rate, its parent company will be subject to additional taxes or defensive measures imposed by source jurisdictions where these companies are located.
“It depends on the magnitude of the discrepancy between the proposed global minimum corporate profit tax rate and the Hong Kong’s standard profits tax rate of 16.5 percent,” said PwC Hong Kong Tax Partner Kenneth Wong.
“If the discrepancy is huge, then multinationals may not have the incentive to operate in Hong Kong. The city’s tax authority may either consider raising the local profits tax rate to generate more tax receipts, or introduce other tax incentives that can attract multinationals to stay in Hong Kong,” he suggested.
In his budget speech last month, Financial Secretary Paul Chan Mo-po also warned that the imposition of a global minimum tax rate may undermine the attractiveness of Hong Kong's low tax policy to multinational corporations. “Thus, it poses challenges to our territorial-source-based tax regime. The proposal will also create additional tax burdens and compliance costs for multinational corporations and affect their willingness to invest and operate in Hong Kong,” he said.
The 36-member OECD, whose goal is to stimulate economic progress and world trade, is still discussing the specific levels of minimum tax rates as it wants to reach an agreement on the principles first.
Chan said the SAR government will continue to keep a close watch on the developments, make assessments and devise corresponding measures.
PWC said the OECD’s plan is an example of the fast-changing international tax landscape. Other issues, such as cross-border e-commerce, cryptocurrency trading and the rise of the digital economy, all call for Hong Kong’s tax code to be updated, it said.
“We urge the government to conduct a comprehensive review of Hong Kong’s tax system to make it relevant and competitive in the fast-changing international landscape. Equally important is a regular review and enhancement of existing tax incentives to make sure they’re effective and attractive,” Wong said.
