Despite the global downturn in the fortunes of dotcom companies, many jurisdictions are still looking to e-commerce as their route to prosperity. Hong Kong is no exception. Already a strong force in the field of e-commerce, experts believe that the SAR's growth as an e-commerce hub could be further encouraged by the provision of significant tax concessions.
It does seem somewhat strange that a country which is seeking to provide a sound environment for e-commerce should be seeking to introduce a tax on Internet users. Tax-news.com reported only last month that the Hong Kong government was considering charging Internet users for each minute they are online, and there are strong concerns that such a tax could constitute a threat to the continued growth of e-commerce in Hong Kong. Yet tax relief in other areas could be provided in the upcoming 2001 budget which would go a long way to bolstering the SAR as an e-business centre.
Possible new measures could be a double deduction for expenditure on approved information technology related consulting work and e-commerce staff training and a tax deduction for capital expenses incurred in setting up e-businesses. Tax consultants have also proffered other suggestions, including salaries tax deductions for the purchase of computers and Internet services for IT training. Hong Kong has a shortage of skilled IT workers, often having to bring them in from outside the region, and this kind of tax relief could stimulate growth at a local level.
It is widely held that the growth of e-commerce does not really fit with Hong Kong's current taxation regime. Yvonne Law, deputy tax managing partner of Deloitte Touche Tohmatsu, said: 'Existing legislation does not cater for the virtual economy'.
The thorny issue of the taxation of e-commerce has reared its head in a big way already this year, with the consensus reached in January by the OECD on whether a website and server constituted a taxable presence in a country. According to the OECD, a website alone was not a taxable presence but a server that carried out more than "preparatory or auxiliary" functions was a permanent establishment.
As a jurisdiction which taxes company profits on the basis of source, it is difficult for the authorities there to define locations when it comes to buying and selling goods over the Internet. Ms Law commented: 'New rules are clearly needed, but any review needs to be on a global basis'.
Tax specialists from PricewaterhouseCoopers (PWC) have also called on Hong Kong's Inland Revenue Department (IRD) to consider the tax implications of e-commerce. Colin Farrell, leader of PWC's Asia Pacific e-business tax team, said: 'The OECD decision may simply increase the local need for a statement on this matter by the IRD.'
It is unlikely, however, that any major changes will be made to Hong Kong's taxation system in the immediate future, whether for e-commerce or Hong Kong's wider tax regime. A report on Hong Kong's tax base is not scheduled to be released until at least the end of November 2001.
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