Challenges to Hong Kong tax residents under the new tax treaty benefit claim procedures in China
Recently, the State Administration of Taxation (SAT) in China issued Public Notice  No. 60 (PN 60) entitled “Administrative Measures on Non-resident Taxpayers Claiming Tax Treaty Benefits”. PN 60, which will take effect on 1 November 2015, introduces a new set of procedures for claiming benefits under the tax treaties of China. The key changes brought about by PN 60 for Hong Kong tax residents include: (1) the removal of the per-approval and record filing requirements under Guoshuifa  No.124 (Circular 124), (2) the introduction of a self-assessment or withholding agent assessment mechanism whereby taxpayers or their withholding agents have to self-assess the eligibility to the tax treaty benefits claimed and file certain forms and supporting documents to the Chinese tax authority in respect of such self-assessment, including a Hong Kong tax resident certificate (HKTRC) for all treaty benefit applicants under the double tax arrangement between China and Hong Kong (China-HK DTA) irrespective of whether it is a company incorporated in or outside Hong Kong; and (3) the removal of the requirement of obtaining a referral letter from the Chinese tax authorities for the purposes of applying a HKTRC.
Although the purpose of the PN 60 is to facilitate the claiming of tax treaty benefit by streamlining the procedures, the above changes will also mean increased burden (as a result of the need to apply for a HKTRC for all Hong Kong tax residents) and responsibility (as self-assessment of eligibility to tax treaty benefits is required) as well as less certainty on a tax treaty benefit claim in advance for Hong Kong tax residents wishing to claim a benefit under the China-HK DTA. Tax treaty benefit claims will also be subject to the close scrutiny by the Chinese tax authorities afterwards and if the claims are found to be unsubstantiated, the Hong Kong tax residents will be required to pay the tax underpaid and subject to late payment surcharge, interest and/or penalty.
Hong Kong tax residents should get prepared for the above challenges presented by the new tax treaty benefit claim procedures in China. PN 60 not only removes the need of referral letter but also places more reliance on the IRD to play a greater role in assessing the entitlement to tax treaty benefits of Hong Kong tax residents. Hong Kong companies making a tax treaty benefit claim under the China-HK DTA should review whether, in addition to being a Hong Kong tax resident, other conditions (e.g. sufficient substance, reasonable commercial purpose and being the beneficial owner of the income received) for enjoying the tax treaty benefits under the China-HK DTA are fulfilled.
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