Hong Kong
by
Stuart Gray, November 2004
IMPORTANT
WARNING:
The contents of this report have been compiled in good
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to investors, but do not constitute investment advice
or recommendations. Investors should not rely upon the
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In geographical
terms, the peninsula and collection of islands in south
eastern China which make up the territory of Hong Kong
are a little over 400 square miles in size, but in economic
terms, the former British colony, which in 1997 was
handed back to greater China, packs a serious punch
on the world stage and can claim to be the globe’s
third largest financial centre after New York and London,
and the ninth largest economy in the world.
How has this
been achieved? Well, the story of Hong Kong’s
economic success has its roots in Britain’s colonial
past, and is not really the focus of this feature. However,
factors such as Hong Kong’s low business and personal
taxation burden, its laissez-faire business environment
enshrined in a common law system based upon English
principles and its unique position as a trading and
investment gateway to China have certainly helped.
One
Country, Two Systems
Politically,
since July 1, 1997, Hong Kong has been a Special Administrative
Region of the People's Republic of China and the constitution
known as the ‘Basic Law’ is modelled on
the constitution of the People's Republic. Under the
slogan of ‘one country, two systems’ which
was established before the handover, the Chinese Government
agreed that Hong Kong's capitalist system would remain
unchanged until the year 2047. This means it has been
pretty much business as usual in terms of the day to
day functioning of the Hong Kong’s economy, (although
it has to be said that question marks remain over Beijing’s
desire to promote democracy in the SAR).
Nevertheless,
the decision by China not to interfere in the local
economy means that little has changed since 1997 to
upset Hong Kong’s financial services system (apart
from external economic factors beyond its control).
Tokyo aside, Hong Kong is Asia’s largest banking
hub in terms of external transactions volume. In mid-2006,
there were 133 licensed banks, 33 restricted licence
banks and 33 deposit-taking companies in business. These
199 authorised institutions operate a comprehensive
network of 1,600 local branches. In addition, there
were 89 local representative offices of overseas banks
in Hong Kong.
Total Employment
in the sector in 2006 was nearly 80,000. Banking assets
amounted to more than US$1 trillion.
Furthermore,
Hong Kong is recognised as the leading fund management
centre in Asia, with the industry defined by its international
and offshore characteristics and has become a popular
choice for hedge fund managers. However, hedge funds
are frequently domiciled elsewhere, owing to the fact
that they are eligible for profit tax in Hong Kong.
The
city’s financial services industry is soon expected
to play a key role in the growth of fund management
and international banking on the mainland, with China
opening up its banking and investment sector under WTO
rules.
In March, 2006, Hong Kong's Legislative
Council finally passed the Revenue (Profits Tax Exemption
for Offshore Funds) Bill 2005.
Under the legislation, offshore
funds, i.e. non-resident entities (which can be individuals,
partnerships, trustees of trust estates or corporations)
administering a fund, are exempt from tax in respect
of profits derived from dealings in securities, dealings
in futures contracts and leveraged foreign exchange
trading in Hong Kong carried out by specified persons
such as corporations and authorized financial institutions
licensed or registered under the SFO to carry out such
transactions.
The exemption will apply retrospectively
to the year of assessment 1996/97.
Low
Taxation
A
great deal of Hong Kong’s economic success is
undoubtedly attributable to a policy of low taxation.
A big advantage is that tax is levied on a territorial
basis, meaning that taxes are only charged on income
arising from or derived in Hong Kong itself. Furthermore
Hong Kong does not levy capital gains taxes, withholding
taxes, annual net worth taxes or sales tax, although
recent budgetary constraints have forced the government
to actively consider the latter. However, if introduced,
sales tax is likely to be at least three years away
according to the government.
The
main tax encountered by business entities in Hong Kong
is profit tax which is charged at a standard rate of
17.5%.
Property
tax is also relatively low, and charged at 15% of the
annual assessed rental income of the property. Hong
Kong does buck the world trend somewhat by retaining
stamp duty on the transfer of shares and market securities
(charged at 0.1%) although it is the intention of the
government to eventually phase out stamp duty altogether.
Personal
income taxes are also low by world standards and constitute
a major draw for foreign residents. Income tax, known
in the SAR as ‘salaries tax,’ is based on
the previous year's income and is charged at progressive
rates to 20% (Aug 2006). The territorial nature of Hong
Kong’s tax system means that there is much scope
to reduce taxation on various forms of income derived
from foreign jurisdictions.
Hong
Kong until 2006 levied an estate tax, charged at a maximum
of 15% on estates valued over US$1,350,000 (HK10.5 million).
However,
the Revenue (Abolition of Estate Duty) Ordinance 2005
came into effect on 11 February 2006. No estate duty
affidavits and accounts need to be filed and no estate
duty clearance papers are needed for the application
for a grant of representation in respect of deaths occurring
on or after that date.
The estate
duty chargeable in respect of estates of persons dying
on or after 15 July 2005 and before 11 February 2006
with the principal value exceeding $7.5 million was
reduced to a nominal amount of $100.
Residence
Hong
Kong owes much of its success to international input,
and its colonial past means that British influences
abound. English can still be heard as the territory’s
official language alongside Chinese. However, the overwhelming
majority of Hong Kong’s densely packed 6.95 million
(July 2006) population are of ethnic Chinese origin,
with the major non-Chinese elements coming from the
British Commonwealth, the US, Japan and Portugal.
All foreign
nationals attempting to gain entry into Hong Kong must
obtain a visa. The one exception to this rule is for
British citizens, who may remain in the territory for
up to six months before having to acquire a visa. However,
the visa rules in Hong Kong are complex, and have become
especially so since 1997. As a general rule those seeking
to reside or work in Hong Kong who do not already have
the right to abode or ownership of land in the territory
need a visa. Whilst it may also be possible to arrive
in Hong Kong on a tourist visa and obtain employment,
it is becoming increasingly difficult for employers
to obtain residential visas via this method, and is
therefore not the recommended path.
Employers
will find the transfer of specialised staff or management
posts within a firm is usually a straightforward business
in Hong Kong, although the SAR government’s policy
on importing labour makes recruiting specialised staff
more difficult, and procedures are in place to ensure
that local workers have ample opportunity to fill a
vacancy ahead of foreign candidates.
Real
estate
People
looking to buy property in Hong Kong will find that
real estate prices have begun to recover after a long
slump which began amid the Asian financial crisis of
1997/1998. Prices were up approximately 30% in 2004
and were around 40% above their historic low reached
in 2003.
As
of September 2004, rents in the city equalled HK$20
to HK$25 per square foot per month for a typical apartment,
climbing to between HK$30 and HK$40 for flats at the
luxury end of the rented market. Sales prices ranged
from HK$5,000 to HK$6,000 per square foot.
Closer
Economic Partnership
As
mentioned, Hong Kong’s unique relationship to
China allows it to serve as a convenient base for international
manufacturers and investors with plans to tap into the
Chinese market place. Beijing and Hong Kong have sought
to oil the wheels of the trading machinery that exists
between the two jurisdictions by agreeing to the Closer
Economic Partnership Arrangement (CEPA), which came
into effect on 1st January 2004. This set in motion
a process of trade liberalisation in goods and services
between the SAR and China and has cemented Hong Kong’s
position as the conduit for investment into the mainland.
By
1st January 2005, the CEPA II deal had removed tariffs
on 1087 categories of goods exported from Hong Kong
to the Chinese mainland. It also removed or reduced
geographical, financial and ownership constraints on
18 services sectors including professional services,
communications and media, financial services and trade
related services. Importantly, these apply to companies
of any nationality provided the firm is incorporated
in Hong Kong, has operated there for a minimum of three
years, is liable to pay tax in the territory, and employs
at least 50% of staff locally.
However,
overseas firms without a presence in Hong Kong can still
take advantage of the CEPA provisions by outsourcing
to, or partnering with, a qualified Hong Kong-based
manufacturer or service provider. Foreign manufacturers
can achieve this by satisfying rules of origin requirements
which essentially means that goods must be ‘substantially
changed’ in Hong Kong to qualify. Overseas service
providers meanwhile, can partner with or invest in a
CEPA-qualified firm to gain greater access to the mainland
market.
Under
the ‘building block’ approach to CEPA adopted
by the decision makers of Hong Kong and the mainland,
in January 2005 there was a further round of consultations
on additional products that will benefit from preferential
tariff treatment.
In June 2006,
China's State Council revealed that it would ease restrictions
on the trading of the Chinese currency, the renminbi,
in Hong Kong under an agreement to expand the scope
of the Closer Economic Partnership Arrangement.
Under the
proposals, Hong Kong importers could be allowed to settle
direct import trades from the Mainland in renminbi,
while financial institutions in the Mainland could issue
renminbi financial bonds in Hong Kong on a pilot basis.
Additional
new measures under CEPA would also cover goods and services,
and enhanced cooperation on intellectual property protection.
In the services
sector, 10 areas would see new liberalisation measures.
They are legal services, construction, information technology,
convention and exhibition, audiovisual, distribution,
tourism, air transport, road transport, and individually
owned stores.
Both sides
are committed to encouraging mutual recognition of professional
qualifications as part of the services rules under CEPA.
Accordingly, a mutual recognition agreement between
Mainland construction supervising engineers and Hong
Kong building surveyors was signed on June 27, 2006
in Beijing, bringing the number of mutual-recognition
agreements or arrangements under CEPA to 10 at that
time.
Hong Kong
travel agents would be allowed to set up wholly-owned
or joint-venture operations in Guangdong Province, to
apply to operate group tours to Hong Kong and Macau
for residents of Guangdong Province on a pilot basis.
Hong Kong
air-transport sales agencies may set up wholly-owned
agencies in the Mainland. The registered capital requirement
will be the same as that for Mainland enterprises.
All these
measures will take effect starting from January 1, 2007.
Since January
1, 2006, the Mainland has granted all products of Hong
Kong origin tariff-free treatment if applications by
Hong Kong manufacturers met the CEPA rules of origin.
Manufacturers may apply to include products that did
not meet the agreed rules of origin in discussions that
will be held twice a year.
Recovery
Economically
speaking, Hong Kong hasn’t had an altogether easy
ride in recent years, and has had to deal with a long
period of deflation; the widespread impact of 9/11 and
the SARS epidemic in early 2003, which joined with cyclical
factors to slow economic growth considerably.
However,
the government is determined to avoid a repeat of the
SARS crisis which virtually shut down the city for a
number of weeks in 2003, in the process crippling the
economy across all sectors and eventually claiming the
lives of 300 people.
Realising
that there is much at stake if another epidemic were
to occur, Hong Kong in 2003 earmarked some HK$1.3 billion
(US$100 million) to be spent on various public health
projects whilst laws have been changed to strengthen
and enforce hygiene standards and promote a more hygiene-conscious
culture among the city’s population.
Fortunately,
2003 proved to be the nadir of Hong Kong’s recent
economic woes - GDP growth in 2005 was estimated at
7.3%.
So,
in summary, Hong Kong holds an enviable position as
the conduit for global investment into China, and with
its economy built firmly on a foundation of low taxation
and decades of expertise as a financial services hub,
it seems that prospects for the former British colony
appear bright, and the jurisdiction is likely to remain
popular both as a place to do business, and a place
where foreigners can take advantage of an attractive
tax regime, for some time to come.
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