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(Source : Government Information Centre)

LC: Second reading of Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005 (English only)

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Following is the speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in moving the second reading of the Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005, in the Legislative Council today (July 6):

Madam President,

I move that the Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005 be read the second time.

The objective of the Bill is to amend the Inland Revenue Ordinance to implement the proposal to exempt offshore funds from profits tax.

The financial services industry is playing an increasingly important role in our economy, contributing to over 13% of our GDP. We must maintain and further strengthen our competitiveness as an international financial centre (IFC). According to the Securities and Futures Commission, 63%, or $1,860 billion of the total assets in the fund management business in 2003 were sourced from overseas investors.

However, Hong Kong is facing keen competition from other major IFCs in attracting foreign investments. In terms of tax treatment for offshore funds, major financial centres including New York and London as well as the other major player in the region, Singapore, all exempt offshore funds from taxation. While in Hong Kong, currently under the Inland Revenue Ordinance, any person deriving trading profits from securities transactions carried out in Hong Kong is liable to pay profits tax regardless of his residence. The industry has expressed the view that due to keen international competition, it is vital for Hong Kong to provide profits tax exemption to offshore funds as with other major financial centres, as otherwise some of the offshore funds may relocate away from Hong Kong, leading to loss of market liquidity and a negative read-across impact on the other financial services, including downstream services such as those provided by brokers, accountants, bankers and lawyers.

To reinforce the status of Hong Kong as an IFC and enhance our competitiveness vis-á-vis other IFCs, the Government proposed in the 2003-04 Budget to exempt offshore funds from profits tax.

Under the proposal in the Bill, offshore funds, which can be non-resident individuals, partnerships, trustees of trust estates or corporations administering a fund, are exempt from tax in respect of profits derived from dealings in securities, dealings in futures contracts and leveraged foreign exchange trading in Hong Kong which are carried out by specified persons such as corporations and authorised financial institutions licensed or registered under the Securities and Futures Ordinance.

To prevent abuse or round-tripping by local funds disguised as offshore funds seeking to take advantage of the exemption, we propose to introduce, as a deterrent measure, specific anti-avoidance provisions to deem a resident holding a beneficial interest in a tax-exempt offshore fund to have derived assessable profits in respect of profits earned by such offshore fund in Hong Kong. These deeming provisions will not apply if the offshore fund is bona fide widely held. Considering that a resident may have difficulty in obtaining information from an offshore fund in which he only holds a small percentage of the beneficial interest, the deeming provisions would also not apply if the resident, alone or with his associates, holds less than 30% of the offshore fund unless such offshore fund is his associate. The effect of the deeming provisions is merely to recoup the tax amount in the hands of residents holding substantial interests in the offshore funds which would become tax-exempt under the proposal.

We have conducted two rounds of consultation with the industry, interested parties and the public in 2004 and 2005 on the approach to effecting the proposed profits tax exemption for offshore funds. Respondents generally consider that our proposed approach is the correct one.

We propose that the exemption provisions should apply with retrospective effect to the year of assessment commencing on 1 April 1996. The retrospective effect is required to provide legal certainty on the tax liability of offshore funds in respect of past years, which is much called for by the industry, while not having much adverse effect on the revenue position. We understand from the market that, in the absence of the retrospective provisions, there would be huge problems for offshore funds to finalise their tax liabilities for past years. There have been precedents in which legislative amendments for implementing tax concession measures have taken retrospective effect.

On the other hand, the deeming provisions would apply upon enactment of the Bill.

If the proposal is implemented, Hong Kong's tax treatment for offshore funds will be on a par with, or even more favourable than, other IFCs such as the US, the UK and Singapore. The proposed exemption would help to attract new offshore funds to Hong Kong and to encourage existing ones too to invest here. Anchoring offshore funds in Hong Kong markets could also help maintain international expertise, promote new products, and further develop the local fund management industry. The proposal would lead to an increase in market liquidity and employment opportunities in the financial services and related sectors.

I hope Members will support the Bill.

Thank you, Madam President.

Ends/Wednesday, July 6, 2005
Issued at HKT 15:32

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