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PricewaterhouseCoopers Issued a Response to the Second Consultation Paper on the Proposed Exemption of Offshore Funds from Profits Tax
On 31 January 2005, PricewaterhouseCoopers Hong Kong issued a response to the Hong Kong Financial Services and Treasury Bureau's ("FSTB") Second Consultation Paper on the proposed exemption of offshore funds from Hong Kong profits tax. The FSTB issued the Second Consultation Paper on 31 December 2004, and the consultation period was set to lapse after one month.
Background and Key Issues
The Paper sets out the FSTB's revised and simplified approach to providing a tax exemption for offshore funds on their Hong Kong-sourced "securities trading profits" from transactions carried out through "section 20AA brokers / approved investment advisors". Offshore profits and capital gains will remain exempt.
New anti-avoidance measures in the form of "deeming provisions" have also been introduced to prevent substantial Hong Kong resident investors from disguising themselves as offshore funds to avail of the exemption ("round-tripping"). A resident may be taxed on its share of an offshore fund's Hong Kong-sourced securities trading profits where it is associated with the fund or, together with its associates, holds more than 30% of the beneficial interest in the fund.
PricewaterhouseCoopers' Reaction to the Revised Approach
Generally, we welcome the new approach outlined in the Paper as the requirements for an "80/20" ratio of non-resident to resident investors and the onerous record-keeping requirements on investment advisors / brokers have been removed. However, a number of hurdles still need to be overcome if the proposed tax exemption is to work in practice.
It is currently unclear whether all of an offshore fund's income will be exempt. The exemption as currently proposed is quite narrow with the section "20AA broker/approved investment advisor" requirement and the restriction of the exemption to "securities trading profits" being particularly significant obstacles.
We have also expressed concern with the "deeming provisions" - in particular that the suggested 30% threshold is too low for anti-avoidance purposes. The provisions may also give rise to numerous seemingly unintended consequences including, inter alia, exposing genuine offshore investors with Hong Kong "associates" to Hong Kong tax. The significance of the Inland Revenue Department's new authority to "see through" residents' offshore investments and tax them on a portion of the undistributed offshore profits should not be underestimated either.
Overall, we welcome the revised approach but we believe that a significant amount of work remains to be done to make the tax exemption and deeming provisions workable in practice.
Get Your Copy Here
Download PwC's response to the Second Consultation Paper (pdf file, 62KB) for your reference.
To read more, please download the Consultation Paper (pdf file, 53KB) from the Hong Kong Financial Services and the Treasury Bureau website. | 