Hong Kong's GST Introduction may Generate Tax Benefits for Local Virtual Offices

In July, Hong Kong Financial Secretary, Henry Tang, offered to trade concessions in income tax in exchange for support for the controversial Goods and Services Tax (GST) in Hong Kong. A GST of five percent has yet to receive its final approval from the Hong Kong government, but as the government suggests that the introduction of GST will have a neutral net impact on the its annual cumulative tax revenue, GST revenues will need to be offset by reductions in other tax income streams. This gave rise to considerations for reductions in corporate profit taxes and other business-related duties.

As Tang stated, Hong Kong's robust growth, moderate inflation and relatively low unemployment signified an appropriate time to begin discussions on the imposition of GST, which will enable the city to broaden its narrow tax base. Only 35% of Hong Kong's entire working population of 3.4 million pays salaries tax. This disproportional statistic represents a growing fiscal burden presented by the increasing number of people who are approaching retirement but represent a substantial portion of high-income taxpayers.

In relation to its effect on commerce, a preliminary list of taxable articles proposes that the lease and sale of commercial properties would be required to pay GST. Furthermore, GST will also likely be charged on ongoing inputs such as office utilities, materials and services.

Balancing the effects of higher rental and input costs, corporate profit taxes may see a reduction. As the government considers tax recession, Hong Kong's corporate profit tax rate may be reduced from 17.5 percent to 12.5 percent if this difference sufficiently offsets the revenues generated by GST. Furthermore, existing duties such as import and export license taxes may also be cancelled or lowered to attain the balance.

Despite the introduction of GST, the government looks to preserve Hong Kong's competitive position as the gateway for doing business in China by not charging GST on goods and services for export and allowing importers to postpone GST payment for three to seven weeks.

From what is understood at this point, GST certainly seems to work in the favor of virtual offices that are operating in Hong Kong and do not have any substance or physical presence in the region. These businesses operate with a registered company but fully outsource local administrative work to an external service provider, which enables them to avoid GST on commercial property or other physical inputs. As many virtual offices generate profits in Hong Kong, the value created from a reduced profit tax are likely to outweigh the GST costs it incurs by outsourcing its administrative services. Therefore, virtual businesses can still benefit from Hong Kong's position as China's trading center, while being able to capture a net profit upside from the city's proposed tax reform.

Keep watching this space!
 

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