Hong Kong Must Stop Dithering Over E-Commerce Tax Says KPMG

Mary Swire, Tax-news.com, Hong Kong

28 February 2001

Hong Kong's policy of 'wait and see' over the taxation of e-commerce is set to damage the Special Administrative Region's levels of economic growth and the Inland Revenue Department (IRD) must stop saying it is under consideration and take immediate steps to prepare guidelines to tackle the issue.

This is the opinion of Lloyd Deverall, head of e-Tax Solutions Group at KPMG Hong Kong, who highlighted the problem in the South China Morning Press earlier this week. Mr Deverall argues that the rapid development of e-commerce results in complex tax issues which must be dealt with in Hong Kong if the jurisdiction is to maintain its reputation as a major international finance centre. Already many of its major competitors have, at the very least, released e-commerce tax guidelines and are leaving Hong Kong well behind in the race to introduce 'relevant e-business incentives.'

The IRD has issued numerous statements saying it is considering the issues but offers no indication on its plans at all. Three months ago Hong Kong's main rival, Singapore, introduced an exemption of withholding tax payments for 'shrink-wrap' software with effect from January 1, 2001. In addition Singapore's Ministry of Finance implemented two tax incentive schemes for stock option benefits in the years 1999 and 2000. The schemes allow employees to delay paying tax on stock option by up to five years and gives a tax exemption of 50% on up to S$10 million of stock option gains over a 10 year period. In Hong Kong the employee is likely to make a loss as tax is still payable on the forecasted profit.

Mr Deverall identified the most basic tax issues in need of practical guidelines such as the difficulty of how to tax an overseas company with no physical presence in Hong Kong but merely an ISP that hosts the company's website. Indeed, would the company be taxed at all by the Hong Kong authorities? Mr Deverall also questions issues surrounding Hong Kong-based consumers performing online transactions, particularly with digital products, with companies based overseas, as 'no guidelines have been issued by the IRD to indicate whether such payments would be regarded as royalties or business profits.'

The OECD Model Tax Convention has advised that a non-resident enterprise with a web site alone should not be considered as a permanent establishment (PE) in that country. Under bilateral tax treaty agreements, if the company does not possess PE status, the non-resident enterprise cannot be taxed by the country in which the web site is based - but Hong Kong, with the exception of China, is not engaged in any other double taxation treaties.

Mr Deverall says that the OECD has provided for a good frame of reference but Hong Kong's IRD needs to adapt the provisions to the jurisdiction's own needs. The IRD has no excuse for dithering over issuing its own guidelines and as time goes on Hong Kong will regret not pulling its head out of the sand and not fulfilling its ambition to compete on a world-class level as an international e-commerce hub.

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