The Financial Services Development Council (FSDC) has released a report that proposes tax refinements with a view to encouraging corporate groups to undertake investment activities in Hong Kong.
Titled “A Proposal for the Introduction of Group Tax Loss Relief in Hong Kong,” the report outlines a potential framework to allow for corporate groups to transfer tax losses among wholly owned companies operating in Hong Kong.
Unlike nearly all other developed economies around the world, Hong Kong’s tax system currently has no group tax loss relief mechanism and only allows a company to carry forward tax losses to offset against its own future profits.
“A competitive corporate tax regime can provide businesses with a suitable environment to innovate, invest and grow,” says Chairman of the FSDC, Laura M Cha. “Allowing the transfer of tax losses among group companies would bring Hong Kong in line with other major international financial centers such as the United Kingdom, the United States and Singapore.
“Alongside its study on the implementation of a two-tier tax system, the Government could consider the feasibility of introducing a group tax loss relief regime, which could drive more business activities in the Hong Kong financial services industry, in particular the banking sector.”
The report describes the need for group tax loss relief in Hong Kong and sets out the various forms that the relief could take. The report suggests that the Government should consider allowing unused tax losses of one company to be transferred to and set off against the taxable income of another company within the same wholly owned corporate group.
Among other proposed features, group tax loss relief would require the companies within the wholly owned group to have the same accounting year.
For the tax losses to be grouped and offset, the tax losses should also arise and be transferred during the time that the companies are in the same wholly owned group. Specific anti-avoidance measures may also need to be implemented.
Supportive of the proposal
KPMG says it supports the proposal, as it is a step towards modernizing Hong Kong’s tax system to ensure that it is globally competitive and it removes a tax impediment to businesses operating via commercially driven corporate group structures.
The FSDC’s proposal does make specific reference to the benefit that would accrue to the financial services industry in Hong Kong from group tax loss relief. However, the benefits of group tax loss relief are not industry specific and would benefit the broader Hong Kong economy by removing a key tax impediment for commercially driven corporate group structures, according to KPMG.
Of particular importance are the implications for entrepreneurship and innovation in Hong Kong, as group tax loss relief will allow businesses to manage commercial risk by operating via a corporate group structure and yet receive a benefit for loss-making “start-ups,” or business ventures.
Given the inherent risk in the high technology sector, group tax loss relief rules would be particularly beneficial in this sector by allowing such businesses to manage risk and effectively provide a benefit early in the investment cycle and incentivize innovation.
The benefit provided by group tax loss relief would complement the Hong Kong Government of the Special Administration Region’s objective of supporting the development of the high technology sector.
Ultimately, Hong Kong must modernize its tax system to support the broader economy, particularly the key growth sectors, and to strengthen its status as a leading international financial centre and business hub. To this end, the introduction of group tax loss relief rules would be a big step in the right direction.