Hong Kong Inland Revenue Issues E-Commerce Tax Guidelines

by Mary Swire, Tax-News.com

16 July 2001

The Hong Kong Inland Revenue Department has released new guidelines regarding the taxation of e-commerce operations.

The new practice notes state that a company's profits from e-commerce are not subject to tax providing its business operations are located outside of the jurisdiction. This is regardless of whether or not the company's Internet Service Provider is based in Hong Kong. The Inland Revenue says it intends to tax companies which conduct their business operations within Hong Kong but employ an overseas ISP.

Lloyd Deverall, a partner at KPMG in Hong Kong, told the Hong Kong iMail news service: 'Clarifying the issue is a useful starting point.' He said that it was likely that this was not the end of e-commerce taxation rules in Hong Kong and they would have to be adapted in the future in order to keep up with the ever-changing nature of e-commerce.

Tax rates applied to commercial operations generally depend on the profit source but because the source of transactions conducted online can be difficult to categorise, the majority of the profit from e-business has escaped taxation. However, the Inland Revenue has plugged that loophole with an amendment to the company tax return form this year requesting information regarding e-transactions, website hosts and the payment gateway providers involved.

Mr Deverall said that although the practice notes are not legally binding, the Inland Revenue will tax e-commerce operations in accordance with those principles. He added that the new policy will encourage companies to hire their servers in Hong Kong while operating outside of the jurisdiction.

Paul Chow, tax partner of Grant Thornton, agreed as he told Hong Kong iMail: 'This is good news for e-commerce businesses in Hong Kong, especially small and medium enterprises and Internet companies. It sends a very clear message to businesses in other countries that Hong Kong now provides certainty of tax treatment regarding e-commerce activities.'

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