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Newsletter / April 2010

 

Chairperson’s Message

There is a saying in Chinese, “the reckonings of man can never match those of the heavens”. Indeed, nature demonstrated once again just how powerful and unpredictable its influence over the affairs of man can be. At the time of writing, the disruption to most of northern Europe’s air traffic due to a volcano eruption in Iceland is still ongoing and estimated to have cost airlines at least US$1.7 billion in losses. The disruptions were unprecedented and far worse than the previous experience after the 9/11 attacks in the US. We can only hope that the eventual economic cost to Europe and the global economy will not be extensive enough to derail the current economic recovery.

 

Nonetheless, we have a piece of good news to share. Hong Kong and the Netherlands has recently signed a comprehensive double taxation agreement which has resulted in the reduction of certain taxes and put in place a structure for dispute resolution. This agreement will likely enhance trade and investment between the two countries and we have devoted a special feature article in this issue on the subject.

  

Warmest regards,

 

Jennifer Chan, Managing Director

 

Spotlight Article - Hong Kong and the Netherlands Sign Double Taxation Agreement

In the last issue of our newsletter, we discussed the imminent passing of regulatory amendments in the Hong Kong Legislative Council so that the territory can implement the OECD Tax Standard and avoid being labelled a tax evasion haven by western powers. Since then, the bill has been signed and in the space of just a few days in late March, Hong Kong signed three double taxation agreements (DTA) with Brunei, the Netherlands and Indonesia. Still to come are France, Austria and Switzerland which are under negotiations. These three agreements are the first steps taken by the government towards achieving the minimum requirement of 12 needed to meet the OECD Tax Standard which caters for the exchange of information across tax jurisdictions in the event of tax evasion investigations.

 

The DTA will cover the following types of taxes: in the case of the Netherlands – income tax, wages tax, company tax (including taxes under the Mining Act), and dividend tax; in the case of Hong Kong – profits tax, salaries tax, and property tax (whether or not under personal assessment). According to the official press release, the DTA will put in place notable changes in the following areas:

 

• Withholding tax currently applicable in the Netherlands will be reduced to 0% instead of the usual 15% rate for dividends received by qualifying persons holding at least 10% of the share capital of the paying companies, as well as dividends received by banks and insurance companies, pension funds, headquarters companies and certain other qualifying entities.
• For all other dividends, a withholding tax rate of 10% will apply.
• For royalties, Hong Kong has agreed to limit its withholding tax to 3%.
• The DTA contains a provision on exchange of information relating to tax matters according to the OECD standard. It allows the tax authorities of both countries to consult each other in order to resolve disputes on the application or interpretation of the DTA. Taxpayers can also request an arbitration procedure in the event of disputes. 

What are the likely impacts on trade and commerce between the two countries having signed such a bilateral tax treaty? We can look back at history for some lessons. Both Belgium (in Dec 2003) and Luxembourg (in Nov 2007) have previously signed DTAs with Hong Kong before. Essentially they operate along the same lines except that the latest batch being negotiated and signed, incorporates the OECD requirements for information sharing on tax evasion matters.

 

Initially, SINOVA received a lot of enquiries as, prior to June 2001, Hong Kong did not have such comprehensive bilateral tax treaties at all and nobody from these countries had experience with a DTA signed with Hong Kong. After about a year, we saw an increasing number of firms – especially from Belgium – wanting to set up a Hong Kong company to conduct commercial activities in or linked to mainland China such as trading, buying and sourcing, sales or even quality control offices.

 

This is because traditionally Hong Kong has always been a commercial gateway for China with its well-educated workforce, excellent infrastructure and pro-business regulatory environment, and historical legacy as a trading hub and financial centre. Prior to having a DTA, there can be ambiguities in tax positions for foreign-owned companies, and businesses are never fond of ambiguities. Therefore, establishing such taxation agreements will definitely lead to an increase in trade and investment as the rules and regulations become transparent and clearer.

 

In fact, the boost to trade and investment works in both directions. Many mainland Chinese companies use Hong Kong as their gateway for international operations. This DTA will further strengthen the position of the Netherlands as a prime choice for establishing (a) European headquarters for Chinese companies looking to do business in Europe.

 

A full copy of the DTA can be obtained from here. For those readers in the airline or shipping businesses, you may also be interested to know that separate taxation treaties on these two industries have been signed by both countries in 1996 and 2000 respectively. Details can be obtained from here. In regards to the latest DTA, the only relevant article for these two sectors says that “profits of an enterprise… from the operation of ships or aircraft in international traffic shall be taxable only in that (country where the enterprise is established)”.

 

Readers should also take note that this DTA or any other tax treaties entered into by Hong Kong has no bearing on taxes encountered in China. Essentially, under the Basic Law of Hong Kong - the autonomously ruled territory’s constitutional document - China guaranteed Hong Kong the right to maintain an independent taxation system free of interference from the mainland until the year 2047.

 

The DTA will still need ratification by both parties’ governments before entering into force. Once ratified, the DTA will apply to any year of assessment on or after 1 April 2011 for Hong Kong, and any taxable years and period beginning on or after 1 January 2011 for the Netherlands.

 

Upcoming Event 

 

The 6^th China (Shenzhen) International Cultural Industries Fair (ICIF) will be held at the Shenzhen Convention and Exhibition Center from 14 – 17 May 2010. This is a national level event hosted by the Ministry of Culture of the People’s Republic of China, Ministry of Commerce of the People’s Republic of China, State Administration of Radio, Film and Television, General Administration of Press and Publication of the People’s Republic of China, China Council for the Promotion of International Trade, Guangdong Provincial People's Government and Shenzhen Municipal People's Government.

 

The ICIF brings together various parties from cultural related industries and products in China and provides a platform for networking and business opportunities. It will consist of six sections: exhibitions and trade, forums, awards, celebration activities, online exhibitions and a job fair. There will be eight exhibition halls in total:

 

Hall 1: China Cultural Industries Projects Trading Hall

Hall 2: Gifts Hall

Hall 3: Digital Movies, Television, Animation and Video Games Hall

Hall 4: Performance Industry Hall

Hall 6: Creative Design Hall

Hall 7: Press and Publication Hall

Hall 8: Art Hall

Hall 9: Arts and Crafts Hall

 

More information can be found at this webpage.

 

Interested exhibitors can apply for a subsidy of up to RMB5,000.  Kindly contact SINOVA on or before 30 April if you are interested to participate in this event.  

 

Other News and Announcements   China’s central government recently released two documents on new rules to encourage and better utilise foreign investment. Briefly speaking, the documents reveal that China will be amending their foreign investment rules to open up more fields to foreign investors and encourage them to invest in high-end manufacturing, the high-tech industry, the modern service sector, and fields involving new energy, environmental-protection and energy efficiency. China will also support and encourage shareholdings and acquisitions by foreign enterprises. Foreign enterprises will be invited to invest in domestically listed companies and will be allowed to raise money in China. They will also be able to issue shares, corporate bonds and medium-term notes, and request loans from financial institutions.   According to a new KPMG study which compared the US, Japan, Australia, Canada, Britain, France, Italy, Germany, Mexico and the Netherlands, the most attractive location for foreign companies is the Netherlands. The report, produced every two years, analysed 27 costs ranging from wages to power and telecommunications. The report also concluded that the Netherlands is the cheapest of the five European countries, despite having one of the highest wage costs. Japan and Germany are the most expensive places to do business.

Economic Snapshot China (1) GDP 2010 Q1 year-on-year change   US$1,178.5 bn 11.90% FDI March 2010     US$9.4 bn 12.08% Import US$119.3 bn 66.00% Export US$112.1 bn 24.30% Hong Kong (2) GDP 2009 Q4 year-on-year change   US$57.4 bn 2.80%   March 2010   CPI 111.7 2.00%   February 2010   Import US$26.0 bn 22.40% Total Export US$23.5 bn 28.50% European Union (3) GDP 2009 Q4 year-on-year change   US$3,975.4 bn -2.30%   2010 Q1   HICP 111.25 1.90% Extra-EU27 Imports US$137.2 bn 6.00% Extra-EU27 Exports US$129.1 bn 12.00% United State (4) GDP 2009 Q4 change from last quarter   US$14,453.4 bn 5.60%   2010 Q1 year-on-year change CPI 217.631 2.30%   February 2010 change from last month Import (Goods  & Services) US$182.9bn 1.70% Export (Goods & Services) US$143.2bn 0.20% Reference Source of Data Exchange Rate (1) Ministry of Commerce and National Bureau of Statistics, PRC RMB:USD = 6.837:1 (2) Census and Statistics Department, HKSAR HKD:USD = 7.764:1 (3) Eurostat, European Commission EUR:USD = 0.746:1 (4) Bureau of Economic Analysis, Bureau of Labor Statistics and US Census Bureau, USA

Disclaimer Please note that the above is published for information and general circulation purposes only. While the information set out above is based on sources believed to be reliable, SINOVA (together with its directors and employees) makes no representations or warranties expressed or implied as to the accuracy, completeness or timeliness of any of such information, and SINOVA accepts no liability for any loss whatsoever, direct or indirect, arising from the use of such information.