The global minimum tax regime to be implemented in Hong Kong beginning 2025 means the city can no longer rely on tax incentives to lure big corporations, but experts say its low salary tax rate will remain a magnet for attracting skilled professionals and maintaining strong capital markets.
The government last week issued a consultation paper to collect views on the implementation of a 15 per cent global minimum tax for large multinational companies, commencing in 2025. The solicitation is open until March 2024.
“Even after Hong Kong implements this floor corporate tax, the city can still compete for large corporations because it has no other indirect tax such as goods and services tax while the individuals’ salary tax in Hong Kong is much lower than in other markets,” said Rex Ho, Asia-Pacific financial services tax leader at PwC.
He said Hong Kong would have to implement this minimum tax rule after 130 global jurisdictions agreed to enforce it, with confirmation awaited from the US and mainland China. Several European countries are set to implement the rule in 2024, while Singapore will do so in 2025, Ho said.
The maximum progressive individual salary tax rate in Hong Kong is 17 per cent, compared with many European countries where the maximum tax rate ranges between 40 per cent and 65 per cent.
“As such, talent would like to work in Hong Kong and many companies still consider Hong Kong a good place to set up businesses here,” Ho said, referring to the territory’s lower salary tax rate.
The international tax reform proposals, drawn up by the Organisation for Economic Co-operation and Development, seeks to ensure that large multinational firms with annual revenue of at least €750 million (US$820.4 million) pay a minimum 15 per cent tax on income derived from all their operations around the world. Hong Kong-based small and medium-sized companies will not be affected by the new rule.
Under the consultation paper, the Hong Kong government will also allow multinationals to submit a single top-up tax return for both the global minimum tax and local tax rules to minimise the compliance burden.
Ho said Hong Kong’s tax rule makes it easy for companies to report and pay their tax when compared with other markets where tax reporting or payment is onerous.
Edmund Wong, a lawmaker for the accountancy sector in Hong Kong, said the new rule may still attract companies from tax haven jurisdictions to move to the city, referring to the condition that relevant jurisdictions will have the right to collect top-up tax if the effective tax rate of a multinational corporation is lower than 15 per cent.
“As the new regime means there are no advantages to set up in tax havens, the large corporations may consider moving their operations from the tax havens to Hong Kong to tap the advantage of the city’s active capital market, sound banking system and huge business opportunities here,” Wong said.
Wong said the new international tax rule also has the benefit of removing uncertainties.
“After implementing the international minimum tax rule, there will be a global standard on calculating the tax rate. It will remove uncertainties and help big corporations in their businesses,” Wong said.
“Tax is the least consideration for many companies. They are more concerned about whether they can operate their businesses in a stable manner and make a profit. Hong Kong still has a lot of advantages to attract these big corporations.”