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Hong Kong and Singapore Counting on Double Tax Agreements

By Laurence E. Lipsher - Email Editor

Date : December 17, 2009

Dear Valued Reader,

In my previous article I inferred that Hong Kong is flirting with compliance with the OECD directives, while still not engaging with the U.S. Internal Revenue Service directly, by signing 11 double taxation avoidance agreements (DTAAs) that include tax information exchange agreements. (For prior coverage, click here) Now I’m convinced of this, despite a November 13 Bloomberg release stating that Hong Kong is the new IRS ‘‘target.’’ Surprisingly, China is another new target.

Actually, the IRS does not need the overt cooperation of Hong Kong’s Inland Revenue Department (IRD). Between all the public information readily available from the Companies Registry and more than 50 percent of banking done in Hong Kong through HSBC, its subsidiary Hang Seng Bank, and Citibank, there is an abundance of data to be mined, little of which would prove the evasion of funds.

Hong Kong is the primary conduit for corporate ownership of Chinese business. The State Administration of Taxation and the IRD not only have a working agreement in the form of a TIEA, but they are actually working with one another, splitting taxation and sharing information regarding Hong Kong entities owning Chinese operations. It works, and frankly, I do not think that either the State Administration of Taxation or the IRD really wants the IRS to muddy the waters.

Singapore

Treaty-happy Singapore has signed its 12th DTAA/ TIEA (with France) and is now promoted from the gray list to the white list. To keep pace, Hong Kong has got to find a 12th treaty partner, which I am sure it will do, and quite soon, too. Perhaps it will even be India, which has expressed interest in doing so.

Singapore now has TIEAs in place with France, Belgium, New Zealand, the U.K., Denmark, the Netherlands, Australia, Austria, Norway, Qatar, Mexico, and Bahrain. The OECD’s standard, published in 2005, sets out how jurisdictions should share information to combat international tax evasion. The United Nations endorsed this program in October 2008.

And yet K. Shanmugam, Singaporean minister for law and second minister for home affairs, at the recent Society of Trust and Estate Practitioners Asia Conference, said:

Spurious requests and fishing expeditions will not be entertained. The request for information has to be specific, detailed and relevant to the tax affairs of the tax payer in question. We will only provide assistance where there is a genuine case, and the requested information is specific and relevant to the case. Certain conditions have to be fulfilled before there can be access to information. We believe that this framework is fair. It confirms to international standards while safeguarding an individual’s right to privacy.

Lawrence Fong, managing director of GCSL Singapore, summed it all up, though, when he asked, ‘‘So who gets to decide what is ‘spurious’?’’

Regarding the overall Singaporean economy, there was a wonderful commentary from Bloomberg’s Tokyo office in mid-September that stated that the current situation in Singapore produced bubbles in both the real estate sector and the stock market.

Singaporean National Development Minister Mah Bow Tan, in an attempt to ‘‘temper the exuberance in the market’’ (compare this statement with then-Federal Reserve Board Chairman Alan Greenspan’s December 1996 ‘‘irrational exuberance’’ statement, where much was said and little was done), announced measures to prevent excessive swings in the real estate market. Singapore, according to a recent Cato Institute study, is one of the 10 freest economies in the world, ahead of either the U.S. or Switzerland. Yet Singapore is doing something about it, while in Hong Kong, there seems to be much noise but no action.

Mark Matthews, a strategist for Fox-Pitt Kelton, believes that in Hong Kong’s case, it may be too late to do anything. Matthews projects a market capitalization- to-GDP ratio of 640 percent. This is four times higher than Singapore’s. Tom Holland, writer of the Monitor column in the South China Morning Post, in an October 26 article said he believes that the influx of cash to Hong Kong (overwhelmingly from China), doubling the city’s monetary base, places Hong Kong in a position of virtual helplessness.

Humbug! When an 816-square-foot one-bedroom apartment sells in Hong Kong for more than US $3 million, the government should take action. If Brazil can slap a 2 percent tax on foreign investment to control irrational exuberance in its stock market, surely Hong Kong can do the same for both its stock and realty sectors. Even without a tax, the Hong Kong government could always relax its overly tight control on land supply and release more land for building. Under the Hong Kong government’s land application system, only two small sites have been sold in two years. Major developers have an abundance of land and are building as they choose. How about taxing this idle land as well? Hong Kong can do something if it wants to. Alas, I doubt if it really wants to do anything at all.

Other recent tax and economic changes in Singapore include the following:

As per the 2009 budget, all resident taxpayers are granted an exemption from tax on all foreignsource income accrued on or before January 21, 2009, and received in Singapore between January 22, 2009, and January 21, 2010. This exemption would also apply to dividends paid by nonresident companies that are more than 50 percent owned by resident taxpayers if the dividends are paid out of profits accrued to them before January 21,2009.

• The Singaporean government passed the Income Tax Amendment Bill of 2009 on September 14. Effective with the 2010 year of assessment, corporation income taxes will be reduced from 18 percent to 17 percent.

• According to the Business Times, Singaporean Finance Minister Tharman Shanmugaratnam announced in Parliament on October 20 that not only will Singapore follow up with another ‘‘extraordinary’’ stimulus package next year, which is likely to be larger than this past year’s US $20.5 billion package, but also spending of this nature will continue over the next 5 to 10 years, increasing from 15 percent of GDP to 17 percent annually. ‘‘Seasoned observers all over the world do not expect the next year or two to be very pretty,’’ Tharman said, as reported by the Business Times. ‘‘Singapore’s economic wagon is still essentially hitched to the U.S. consumer, partially via China. Will the U.S. consumer start splurging again? Not anytime soon. Can Singapore rely on consumers in China or the rest of Asia to pick up the slack? Same answer. . . . We are spending a lot more next year and the coming years compared to the past. If we take infrastructure alone, we are spending more [and] the government will extend the US $4.5 billion Jobs Credit scheme, as well. . . . The key issue is not merely going to be the size of the fiscal year deficit that we are going to run in the next fiscal year, but the type of measures that we are going to put in place. We would be more discriminating.

• The Financial Times reported on November 17 that Temasek, Singapore’s sovereign fund, sold its first tranche of 30-year bonds just a month after selling 10-year bonds. The US $500 million of bonds were priced to yield 115 basis points more than comparable U.S. Treasury bonds, offering investors a long-term alternative to the US $1.5 billion of 10-year bonds issued last month. Global credit agencies have given these bonds AAA rating, something rare for Asia. I wonder how much investment will come from U.S. funding.

Macao

Macao Chief Executive Edmund Ho, in his final policy address to the Macao legislature, 1 announced on November 18 that not only will the government set up its own central provident fund (social security system) but that it will use all of the excess tax revenue from the gaming industry by starting an MOP 10,000 account for every Macanese resident over age 22. Thus, approximately 330,000 people will be funded in their new retirement scheme. Also, last year’s ‘‘temporary’’ increase of the threshold for nontaxable income from MOP 95,000 to MOP 120,000 will be continued for the next fiscal year.

Taiwan

I recently received a couple of e-mails from U.S.- based clients or CPAs in need of a Taiwanese CPA. Hey, that’s great — being able to refer someone is always a win-win situation. Unfortunately, I’m having a problem because every Taiwanese accountant I know is busier than ever because Taiwan’s so-called alternative minimum tax on foreign-source income finally is coming into existence on January 1.

Despite protest after protest after protest, which have delayed implementation of the Taiwanese AMT since 2006, a staggering fiscal deficit (which worldwide depressions do seem to cause) has forced the government to take action now. Under the AMT, resident individuals of Taiwan (not just its citizens) will be taxed on their offshore income at 20 percent if income exceeds NT $1 million (approximately US $31,000). Boy, oh, boy, does this present a problem to every resident who is involved in some form of Chinese operation. Complicating things even further is that many residents have green cards and are subject to an aggressive IRS that they’ve never previously experienced. What happens when China signs TIEAs with both Taiwan and the U.S.? The Taiwanese entrepreneur will get it both ways, making a previously comfortable situation, for lack of better word, rather ‘‘taxing’’!

Indeed, this will happen. On November 16 the Financial Times reported that China and Taiwan have signed a financial memorandum of understanding that will allow banks from each side of the Taiwan Strait to open up branches on the other side. Even Hong Kong is getting into the act — HSBC held its first board meeting in Taipei in November. The TIEA is coming next, and when the China-U.S. TIEA happens, China will use the agreement as its own ‘‘back door’’ to Taiwanese tax evasion in China.

Taxwise, two other items are noteworthy. Late in April, the Taiwanese parliament incorporated the substance-over-form principle within its Tax Collection Act. Henceforth, Taiwanese tax offices will start looking into ‘‘substantive economic relationships and the actual, beneficial owner of economic benefits’’ as the basis of taxation.

The Taiwanese Ministry of Finance on September 3 issued a ruling providing guidelines for characterization of Taiwanese-source income. This ruling clarified that income received by Taiwanese entities (other than for purchase of goods) will be taxable. This includes services performed outside Taiwan by a Taiwanese entity. The ruling also stated that profits generated from activities outside Taiwan, while not regarded as Taiwanese-source income, are going to be subject to the Taiwanese AMT. So what’s the difference whether it is source income or nonsource income? It will be taxed at the same rate, regardless of what you call it.

Looking at all that’s happening — or going to happen — in Taiwan makes it quite understandable why Taiwanese CPAs and tax attorneys are up to their necks in work at a time when they should be on holiday. Such is life, though, for an island jurisdiction of 23 million people dependent on manufacture for export in either China or Vietnam during a period when exports have not quite disappeared but have been substantially reduced.

Until next time,

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