(Source : Government Information Centre)
Cross-border tax arrangements
The Commissioner of Inland Revenue, Mrs Alice Lau Mak Yee-ming explained today (December 11) the recent agreement reached with the State Administration of Taxation of the Mainland (SAT) over certain issues that are of concern to cross-border employees.
Speaking at a conference organised by the Hong Kong Society of Accountants, Mrs Lau said that with increasing activities between the Mainland of China and Hong Kong, businesses and individuals doing business or working on both sides had encountered difficulties because of the differences in the taxation systems of the Mainland and Hong Kong.
With a view to resolving such problems, the Mainland and Hong Kong reached consensus in relation to a number of areas, which are detailed in the "Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation on Income" which came into force on April 10, 1998.
In the last five years, the tax authorities of both sides met regularly to discuss matters relating to the interpretation and implementation of the Arrangement.
The clarifications obtained from the SAT are included in a pamphlet released by the Inland Revenue Department on its website (www.info.gov.hk/ird) today. The pamphlet aims to further enhance the transparency in tax administration and bring certainty in areas that affect taxpayers.
Comments and feedback are welcomed from taxpayers and tax practitioners so that refinements can be made to the pamphlet before printed copies are issued.
A summary of the pamphlet is in the Annex.
A Guide for Hong Kong Residents working across the Mainland border
1. The purpose of the Arrangement is to allocate the right to tax between the two jurisdictions on a basis that avoids double taxation of income on the part of taxpayers and for that matter, double non-taxation on the part of tax authorities of the two sides.
2. Article 3, paragraph 2 of the Arrangement deals with the taxing right of employment income. If a resident of Hong Kong derives employment income, the person will only be taxed in Hong Kong unless he exercises his employment in the Mainland.
3. An individual is generally considered to be a Hong Kong resident if he is liable to tax in Hong Kong and is:
(i) of or above the age of 18 years, or under that age if both his parents are deceased; and
(ii) a permanent or temporary resident.
4. Exemption from Individual Income Tax (IIT) in the Mainland is available only if all the following three conditions are satisfied:
* The Hong Kong resident stays in the Mainland for a period or periods not exceeding an aggregate of 183 days in the calendar year concerned;
* The income is paid by, or on behalf of, an employer who is not a resident of the Mainland; and
* The income is not borne by a permanent establishment or a fixed base which the employer has in the Mainland.
For example, a Hong Kong resident who is sent by an employer which does not have a permanent establishment in the Mainland, to work in the Mainland, will not be liable to IIT in the Mainland provided the period of his stay in the Mainland does not exceed a total of 183 days in the calendar year.
5. If the above exemption conditions are not fully met, the employment income derived by a Hong Kong resident in respect of employment exercised in the Mainland is subject to IIT as follows:
(a) If he is employed to render services only in the Mainland and no services are rendered in Hong Kong, the whole of his income should be subject to IIT in the Mainland.
(b) If he is employed to render services both in the Mainland and in Hong Kong and the aggregated periods of stay in the Mainland-
(i) do not exceed 183 days
Income paid or borne by the Mainland entity will be chargeable to IIT. Tax will be calculated on the chargeable income and then apportioned on time basis. Income paid by an overseas employer (including a Hong Kong employer) is not chargeable.
(ii) exceed 183 days
The total income received from the Mainland entity and the overseas employer (including Hong Kong employer) will be chargeable to IIT. Tax will be calculated on the total income and then apportioned on time basis.
6. The tax liabilities of the Hong Kong resident in Hong Kong are:
(a) If all services in connection with his employment are rendered outside Hong Kong, no salaries tax is chargeable.
(b) If the source of his employment is in Hong Kong, the whole of his employment income is chargeable to Hong Kong Salaries Tax. However, if he has paid Individual Income Tax in the Mainland in respect of the services rendered in the Mainland, he can apply to have that part of the income excluded or can claim a tax credit.
(c) If the Hong Kong resident has non-Hong Kong employment, he will be assessed for salaries tax only in respect of services rendered in Hong Kong.
7. There is a two-tier test in the counting of days:
The first tier
* In determining the taxing right (ie, the 183-day rule) in the Mainland, any day in which a Hong Kong resident is physically present in the Mainland will be included and part of a day is counted as one day ("the N days rule").
* For example, if a Hong Kong resident visits Shenzhen in the morning and returns to Hong Kong in the afternoon, he is regarded as present in the Mainland for one day for the purpose of the 183-day rule.
The second tier
* In determining the tax liabilities in the Mainland, normally either the day of arrival or day of departure is counted as one day. In other words, the number of days for this purpose is physical presence minus 1 (the N-1 day rule).
* For example, if the Hong Kong resident goes to Shenzhen on April 1 to work and returns to Hong Kong on April 3, he is treated as having rendered services for two days in Shenzhen.
* However, if he goes to Shenzhen in the morning to work and returns to Hong Kong in the afternoon to continue working in the Hong Kong office, the N-1 day rule would not be appropriate. In this situation, it is accepted that half-day's service is rendered in the Mainland and half-day's in Hong Kong in determining his tax liabilities.
Ends/Thursday, December 11, 2003