(c) Hong Kong Institute of Certified Public Accountants. Contact HKICPA for permission to reproduce this article., Tax

A greater role in the Greater Bay Area

A unified Greater Bay Area, linking key Mainland cities to Hong Kong and Macau, could enhance the competitiveness of the region, but we need better collaboration between the cities involved. A Plus hosts around table discussion featuring tax experts to look at the harmonization issues and what the initiative means for Hong Kong.

The Guangdong-Hong Kong-Macau Greater Bay Area (GBA)
initiative, set out by the Mainland China government, aims to create an
economic powerhouse in the region, but there are a multitude of challenges in
implementing the scheme.

Exact details of the initiative are not yet known, with the
GBA blueprint expected to be issued in late September or early October. But in
essence, the scheme’s “9+2” concept aims to develop nine cities in Guangdong
province, plus Hong Kong and Macau, into a world-class city cluster that will
play a leading role in innovation, advanced manufacturing, trade, finance and
logistics.

It is modelled on similar initiatives in other countries,
such as Japan’s Greater Tokyo Area, the United States’ San Francisco Bay Area
and New York metropolitan area.

Each city in the GBA will have its own sectorial focus.
Sarah Chan, Partner, Tax and Business Advisory Services at Deloitte China,
explains that the initiative is expected to lead to synergies between the
different cities, as well as greater integration, through business cooperation
and increased mobility of both goods and people. This will be facilitated by
enhanced transport infrastructure, including new airports, highways, transport
hubs and the high-speed rail link. “The government has set targets, one of
which is that in the long run the GBA will out-rate other bay areas,” she says.

Hong Kong’s role

Already, the 11 cities pack a significant economic punch,
with the combined GBA producing a gross domestic product (GDP) of US$1.4
trillion in 2016, equivalent to 12 percent of Mainland China’s economy,
although it is home to only 5 percent of the country’s population.

The initiative is expected to accelerate the transformation
the region is already undergoing, with highly polluting industries forced to
shut down, and being replaced with high-end, high valued-added manufacturing
activities.

The GBA cities are also expected to compete with each other
to become centres for various industries – Shenzhen, for example, has already
established itself as a premier high-tech innovation hub and research and
development (R&D) centre.

Lorraine Cheung, Partner, China Tax and Business Advisory Services
at EY, points out that while the Hong Kong government is promoting R&D and
offering a match funding scheme, given the size of Hong Kong, competing with
Shenzhen in this area could be difficult. “If companies are considering whether
to put their production in Hong Kong or Shenzhen, when they look at the whole
supply chain, they will likely choose Shenzhen – as the supply chain ecosystem
is better developed. Hong Kong faces land supply constraints, which hinders the
development of a comparably-sized ecosystem,” she says.

William Chan, Tax Partner at Grant Thornton, agrees that the
high rental cost in Hong Kong makes it unattractive for businesses to relocate
their manufacturing activities.

But Catherine Tsang, Partner, Tax and China Business
Advisory Services at PwC, suggests this fact means Hong Kong companies are
well-placed to benefit from the enhanced cooperation with other GBA cities, as
well as the improved transport links under the initiative. She adds that for
its part, Hong Kong should promote its financial services sector and strong
professional services expertise. “Companies could register their intellectual
property in Hong Kong because the city has a good legal system for that. They
could then use other services here like accounting and valuation.”

In fact, Hong Kong’s Financial Secretary Paul Chan recently
said at the World Economic Forum’s Annual Meeting of the New Champions that, as
an international finance centre with the best professional services in the GBA,
Hong Kong could become the premier listing and fundraising location for
Mainland enterprises. He added that Hong Kong would also look to complement
other cities in the GBA by building an international information and technology
hub, with a particularly focus on developing FinTech.

Tax challenges

While the GBA initiative has the potential to create
significant opportunities for Hong Kong, uncertainties remain about how tax
issues will be handled.

Sarah Chan explains that, unlike other bay areas, the GBA
will involve three different legal jurisdictions and three different tax
policies. Falling under the Mainland’s tax regime is unlikely to appeal to
either businesses or people from Hong Kong. Corporate income tax in China is
charged at 25 percent, compared with 16.5 percent in Hong Kong, while personal
income tax is also higher on the Mainland with a top rate of 45 percent,
compared with one of 17 percent in Hong Kong. William Chan adds: “Under the
recently revised China Individual Income Tax (IIT) Law, if people move from
Hong Kong to the GBA to live or work they could end up paying tax on their
worldwide income. Whereas, they may only need to pay salaries tax on Hong Kong
income if they live in Hong Kong.”

Daniel Hui, Partner, China Tax at KPMG, explains that there
is a preferential tax policy for Hong Kong people living and working in the
Qianhai free trade zone, under which certain eligible individuals would pay tax
in China, but receive a rebate to give an effective income tax rate of 15
percent. “We would like to see a similar proposal for Hong Kong people working
in the GBA,” he says. But he adds that this would require a subsidiary from the
Chinese government, and the profession would like to see further developments
on this area.

Value-added tax (VAT) could be another challenge. Hong Kong
and Macau do not have VAT, but in Mainland China VAT is charged at 16 percent
on many goods and services – creating issues for companies that have bases in
both Hong Kong and the other GBA cities in the Mainland.

Cheung explains that companies may produce a prototype in
Hong Kong, but when they ship it to Shenzhen, they have to pay customs duty and
VAT. When the first stage of manufacturing is completed, and they need further
high value processing, they may ship it back to Hong Kong. “There are VAT and
duty levies all along the way. Alignment of tax and duties is needed for the
free flow of goods, and to make the GBA a cohesive supply chain for
corporations,” she says.

In Mainland China there is a tax credit system for VAT but
this is only available to entities that have VAT registration, and Hong Kong
companies cannot currently go through this registration process.

William Chan says: “There does not necessarily have to be an
exemption, but if Hong Kong companies are allowed to register as VAT payers in
Mainland China, these entities can get into the VAT system and qualify for
refunds or credit offsets. He adds that even if companies did not face the VAT
issue, having to clear customs hampers innovation between Hong Kong and GBA
cities because it takes time.

It is also currently unclear if any tax incentives will be
introduced to encourage the mobility of people and companies within the GBA.
William Chan says: “At the moment, no tax policy has been issued. The reason
for this may be that they are not going to use tax policy as a driver. Like the
San Francisco Bay Area, they may build infrastructure to get people to
congregate there, rather than give a financial incentive to attract people to
relocate to build business.”

Workforce mobility

Aside tax issues, other factors may inhibit Hong Kong people
from working in the GBA.

Tsang says the recent removal of the work permit requirement
for people from Hong Kong taking up jobs in the Mainland is a step in the right
direction.

The introduction of a new identity card, giving Hong Kong
citizens access to a wide range of public services, such as education and
healthcare, while they are residents in the Mainland, should also help. But
Sarah Chan points out that it is still not easy for people from Hong Kong to make
the transition: “You need to get a card from the local government, and you need
to live there for half a year before you are qualified to get a card. There is
no fast track.”

Tsang also points out that the 183-day rule will be used to
determine tax residency under the newly passed IIT law. This complicates
matters, as it would mean people who qualified for the resident card would also
be classified as tax residents and be liable for tax on their worldwide income.
“Because of the amendment to the IIT law, people may be wary of applying for
the cards,” Tsang says.

Government incentives

Assuming that these issues are resolved, people in Hong Kong
may still need some form of incentive from the Hong Kong government to
encourage them to move to the GBA.

The transport infrastructure, including the new high-speed
rail link, will mean the majority of the GBA cities are within one to one-and-a-half
hours of Hong Kong. This has led to suggestions that dormitory villages could
be created in the GBA, where property is cheaper, for Hong Kong residents, as
well as encouraging retirees to live in Mainland China.

But, alongside the promise of cheaper housing, incentives
are likely to be needed to encourage Hong Kong people to relocate, such as
portable social welfare benefits for the elderly, and some form of rental or
interest deductions for those living in Mainland cities but still working in
Hong Kong.

Tsang thinks young people in particular may need
inducements, such as internships, so that they can experience in person the
benefits that the opportunities within the GBA offers. “Youngsters from Hong
Kong need to leave their comfort zone and be comfortable to mingle with their
peers in Mainland China. To help, the issue of Mandarin not being their first
language would also need to be overcome.”

There is expected to be greater mobility from Macau, which
is more focused on the leisure industry, making it easier for young people to
move to the Mainland to work in theme parks, Hui says. Tsang adds that it is
also important to remember that mobility within the GBA should be two-way. “It
is not just about going into China, but also attracting talent to Hong Kong as
a financial centre,” she says.

Recognition of professional services

Another potential stumbling block is the lack of recognition
in the Mainland of professional services qualifications from Hong Kong.

Some Hong Kong professionals cannot practice in China due to
the licensing limitation. For instance, finance professionals are not able to
give real-time advice to companies unless they come to Hong Kong. Likewise,
foreign lawyers are not allowed to advise on Mainland law in China.

William Chan says: “Hong Kong financial services and certain
professional services providers are not allowed to provide their services in
China, and that prevents us from providing services there. Further market
liberation in the Mainland would lead to easier market access by the Hong Kong
professionals.” Some sort of mutual recognition scheme for qualifications is
needed, he adds.

But Tsang points out: “If we are asking for this status of
mutual recognition, we must be prepared to open up the Hong Kong market to
qualified Mainland professionals. It cannot be just one way.”

Overall, Hui thinks that in order for the initiative to be a
success, the ease of doing businesses between Hong Kong and other GBA cities
needs to be increased. “You need to leverage this initiative, so that when Hong
Kong people and businesses go into China, it is easier and less costly,” he
says. “There are some things you can’t change, like the tax law, but the ease
of doing business you can.”

Tsang agrees: “The GBA definitely has a lot of opportunities
for Hong Kong people in the long run but they need to break down the hurdles.”

This article was originally published in the September 2018 issue of A Plus. You can also read the digital edition.