6 May 2016
‘Belt and Road’ Opportunities for Hong Kong
By Hong Kong General Chamber of Commerce
In 2013, Chinese President Xi Jinping visited Central and Southeast Asia. During his visit, he had proposed joining hands to build a “Silk Road Economic Belt” and a “21st-Century Maritime Silk Road” (Belt and Road). Since then, this innovative concept of Belt and Road has attracted a great deal of attention from both China and even the rest of the world. Similarly, this concept has sparked discussions among industry insiders in Hong Kong. As an integral part of the Mainland, Hong Kong can play a role in the Belt and Road plan.
Some target countries and regions are emerging economies or developing countries whose legal systems are not that sound. This might lead to challenges for investors. These host countries would usually impose higher tax rates on foreign investment, or in terms of international tax, e.g. definition of Permanent Establishment, they may disregard international practice, or even apply more stringent policies than the international common practice.
Chinese businesses “going abroad” might be treated unfairly, and thus could run into tax disputes. In this regard, we suggest that enterprises should think through the tax policy of host countries and multilateral tax regulations applicable to the “going abroad” projects, in order to minimize any tax burden.
Many developing countries along the Belt and Road roadmap have a less than favourable investment environment. Large-scale PRC enterprises may act as the leading force, jointly with other PRC enterprises, in an attempt the test out the unfamiliar investment environment.
Taking China-Belarus Industrial Park as an example, it will offer preferential taxation by the 10+10 formula to investors, i.e. exemption of 100% corporate income tax for the first 10 years from the date of registration in the park and 50% reduction of corporate income tax for the next 10 years of operation in the park. In addition, employees joining companies in the park also enjoy tax benefits, as well as “one-stop” services during the setup and post-establishment of the enterprises in the park. To date, six enterprises, including YTO Group, ZTE, Huawei, and China Merchants Group, have confirmed and signed an agreement to set up in the park. Around 10 other enterprises have indicated interest, and are considering the options of entering the park.
Hong Kong as a “Super-connector”
Despite financing from the Asian Infrastructure Investment Bank, Silk Road Fund, China Development Bank, and other institutions led by the PRC Government, financing in respect of Belt and Road related infrastructure remains a major shortfall – around US$8 trillion according to market estimates.
Currently, there are already some Hong Kong finance and insurance institutions who have actively participated in Belt and Road projects, and have utilized their experience and strength in the financial services sector. Through cross-border M&A project financing, construction project financing, international factoring, and the combined use of general debt, preferential debt, and other investment and financing combinations, enterprises are presented with a multitude of financing options.
On the other hand, due to its unique economic position and geographical location, Hong Kong plays a vital role as a super-connector in the Belt and Road roadmap. As an investment hub, the tax treaty benefit under the PRC-HK Double Taxation Arrangement would provide investors with higher tax efficiency.
When facing challenges arising from multi-locations operations, multiple currencies and multinational supply chains, enterprises can leverage Hong Kong’s position as a transport hub, international finance centre and window to the West. Doing so can raise enterprises’ international management standards, as well as expand their global market network. In reality, many Chinese enterprises have set up a finance platform in Hong Kong, or are targeting Hong Kong as a “going abroad” platform.
With the high profile of the Belt and Road policy, the “going abroad” of Chinese enterprises has already evolved into a mechanism that integrates economic, political and cultural factors. In the complicated external economic environment, there is an increasingly difficult international tax environment along with products, projects, investments and personnel “going abroad.” Properly handling these problems requires the wisdom and collaboration of entrepreneurs, governments and professionals.
This article is firstly published in the magazine The Bulletin of the Hong Kong General Chamber of Commerce (January 2016 issue). Please click here to view the full article.