KPMG welcomes the proposal by the Financial Services Development Council (“FSDC”) to introduce group tax loss relief...
KPMG welcomes the proposal by the Financial Services Development Council (“FSDC”) to introduce group tax loss relief as set out in its paper titled, ‘A Proposal for the Introduction of Group Tax Loss Relief in Hong Kong’ (“Proposal”) that was released today.
The Proposal outlines a potential framework to allow for corporate groups to transfer tax losses amongst wholly owned companies operating in Hong Kong. Unlike nearly all other developed economies around the world, Hong Kong currently has no group tax loss relief mechanism. The current rules only allow a company to carry forward tax losses to offset against its own future profits.
Ayesha Lau, Managing Partner of KPMG Hong Kong, says: “We support the FSDC’s proposal to introduce group tax loss relief as a step towards modernising Hong Kong’s tax system. Hong Kong’s current tax loss relief system is very much outdated and in need of an update to accommodate the needs of Hong Kong businesses. More importantly, Hong Kong needs to continue to evolve and innovate in order to maintain its competitiveness as an international hub and financial centre.”
The Proposal outlines the case for Hong Kong to introduce group tax loss relief and provides an overview of the various group tax loss relief mechanisms in operation in OECD member countries.
Lau says: “Overall, there is a general trend for OECD member countries to reduce corporate tax rates and to modernise their tax systems as a means of supporting local businesses and attracting foreign capital and investment. Aligning and simplifying tax rules also remains high on the agenda for OECD member countries. With this changing landscape, Hong Kong cannot simply rely on its low tax system to stay globally competitive, particularly when Hong Kong’s 16.5 percent corporate tax rate may not be ‘low’ based on international developments.”
Hong Kong should no longer remain an outlier with respect to group tax loss relief. Singapore, for example, introduced group tax loss relief back in 2003. Lau stresses that “Now is the right time to consider group tax loss relief in Hong Kong. The enhancement of Hong Kong’s global competitiveness as an international financial centre and business hub via tax policy reforms are compelling reasons to introduce group tax loss relief as part of a broader initiative to improve the overall competitiveness of Hong Kong’s tax regime.”
The FSDC’s proposal makes specific reference to the benefit that would accrue to the financial services industry in Hong Kong from group tax loss relief.
Darren Bowdern, Partner and Head of Financial Services Tax KPMG Hong Kong, says: “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.”
The current rules on tax loss relief discriminate against taxpayers that operate multiple businesses through separate companies compared to those that operate a number of separate businesses in the same company; the former cannot transfer a tax loss from one group company to another, whilst in the latter scenario, tax losses from one business can be offset against profits of another business as they are conducted in the same legal entity.
Bowdern highlights that "some key beneficiaries of these rules would be start-up businesses and businesses operating in the high technology sector. New business ventures undertaken in separate corporate entities would be able to offset their tax losses against the profits of group companies and alleviate the financial burden of any start-up costs, or commercial failure. This would be a great initiative to encourage Hong Kong businesses to invest and innovate."
Group tax loss relief would in part incentivise investment by allowing high technology businesses to manage risk via a corporate group structure and yet receive a tax shelter if an investment goes bad. Moreover, the Financial Secretary recognises the importance of investment in the high technology sector and earmarked HK$10 billion towards the development of the sector in his 2017-18 Budget speech; group tax loss relief would complement this funding initiative.
The full version of the Proposal can be downloaded from the ‘Publications’ section of the FSDC website: http://www.fsdc.org.hk/en/publications/2017
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