GBA: Stark differences in taxation deter integration – for now

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Under the Greater Bay Area initiative, eleven cities including Hong Kong are being drawn together to become a regional powerhouse, but the integration of the city cluster is facing unprecedented challenges posed by melding three distinct jurisdictions in one economy.

Erase the boundaries

At the Greater Bay Area Financial Forum held on August 29, Hong Kong’s chief executive Ms Carrie Lam said the authorities must reduce policy barriers caused by the different systems in these jurisdictions.

“[This way,] it would be easier for residents in the Greater Bay Area to live, work, study and do business in the area,” she said.

To make the initiative successful, there needs to be a free flow of people, capital, goods and information to encourage integration. But the movement of people is restricted by differences in tax policies between Hong Kong and mainland China.

Tax trouble

Currently, the personal income tax rate can go up to 45 percent in mainland China, while Hong Kong’s personal income tax is cappted at 17 percent.

To make matters worse, China has proposed an amendment to its Individual Income Tax Law in July to also make one’s income earned outside China taxable in China, at Chinese rates.

Foreigners, including Hong Kongers in this case, will be deemed as “residents” and subject to Chinese tax on their worldwide income if they reside in China for over 183 days, rather than the current requirement of residing for more than five years.

If approved, the new 183-day-rule will take effect on January 1, 2019. That means taxes would also be levied on earnings from Hong Kong.

Welcome to China! And Chinese taxes!

Meanwhile, China is rolling out a programme, starting from September, whereby Hong Kongers can get an “identity card” to live in China as a resident. This would also then subject them to this new income tax policy.

Mr Dickson Leung, senior partner of accountancy firm Lehman Brown works in Beijing and claims that the amendment will discourage Hong Kongers from working and running businesses in the Greater Bay Area.

“If a Hong Konger works in my company, it wouldn’t make sense for him to earn less in China than in Hong Kong,” he said. “It would also be high costs for the employers to bear the tax difference to lure Hong Kongers to come and work.”

Calling for solutions

Secretary for Constitutional and Mainland Affairs Mr Patrick Nip Tak-kuen said exempting Hong Kongers from the hefty income tax in the GBA region would be difficult, as it involves central government policy.

Having said that, he cited two special economic zones, Hengqin in Zhuhai and Qianhai in Shenzhen, where Hong Kongers are offered tax concessions. But those concessions are offered at the local level of government.

At the same financial forum, Mr Charles Li, head of Hong Kong’s stock exchange, suggested artificial intelligence as a solution to monitoring work done in China to stay under the 183 day limit, without amending any policy.

Mr Li said by using new technologies, the length of stay in China could be counted by the hour or even minute, and employees would be reminded to leave China when “time is up”.

“The legal system is different in both places, but there should not be any changes or assimilation. The advantages of both places create chemistry for the integration within the GBA,” said Mr Li.

But veteran politician Mr Tam Yiu-chung from the pro-government party DAB is calling for tax relaxation for Hong Kongers. Earlier, he wrote a letter to China Liaison Office Director Mr Zhang Xiaoming to make this appeal.

“The new tax policy might affect those who intend to retire in China, since their other income, such as that from stocks, would be subject to the tax too,” he said.

He believes it is not the intention of the central government to give Hong Kongers a resident permit – and then to trap them into the new tax policy.

(Printer – R&R Publishing Limited, Suite 705, 7/F, Cheong K. Building, 84-86 Des Voeux Road Central, HK)