Hong Kong Insurers Ready Themselves For Tax Battle

by Mary Swire, for LawAndTax-News.com, Hong Kong

08 April 2004

Hong Kong's insurance industry is gearing up for a protracted and bitter battle with the Inland Revenue Department over a provision contained in new International Accounting Standards Board rules which could exempt some investment-linked insurance products from tax.

Currently, the Hong Kong government imposes a standard profits tax of 17.5% on 5% of the aggregate annual premium income of such insurance products. However, under Rule IFRS4, set to come into force next year, policyholder contributions to investment-linked products are not classified as premium income.

Insurance firms argue that therefore, under Hong Kong law, policyholder contributions (which came to around $14.5 billion last year) should be exempted from tax when the new rules come into effect in 2005.

Speaking to the South China Morning Post this week, PricewaterhouseCoopers tax partner, Tim Lui Tim-leung predicted that:

"Both sides will stand firm. The government stands to lose a huge source of tax income, while the insurance companies could add an equivalent amount to their bottom lines."

KPMG partner, Steve Roder confirmed the possibility of a drawn-out dispute over the new rules, explaining to the SCMP that:

"It is hard to tell which side will win, as both the government and the insurance companies have a lot at stake."

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