China’s ambitious Greater Bay Area initiative, linking key mainland cities to Hong Kong and Macau, could see much faster economic development in the region
This article was first published in the February 2018 China edition of Accounting and Business magazine.
Rather than pitting its cities against each other and against more developed rivals abroad, China is adopting an approach that has worked elsewhere – such as in New York or Tokyo. The Greater Bay Area initiative – outlined in the 13th Five-Year Plan (2016-20) will integrate Hong Kong, Macau and nine cities in South China into a single integrated economic zone.
According to PwC, China’s Greater Bay Area could emerge as the largest ‘bay area’ economy in the world by 2030. With US$1.36 trillion in GDP already recorded in 2016, that doesn’t seem too far off.
The Greater Bay Area’s size and diversity is its greatest strength. But with 11 different economies and three jurisdictions, it also presents potential challenges, including how to develop a tax structure.
‘Hong Kong adopts a territorial taxation system where onshore profits are subject to the local corporate tax regardless of the taxpayer’s place of residence or incorporation,’ explains Ayesha Lau, managing partner at KPMG China’s Hong Kong office. ‘Companies incorporated in mainland China, however, are taxed on their worldwide income and non-resident enterprises are taxed on their onshore profits.
‘In Macau, a local incorporated company would, in practice, be subject to corporate tax on all of its income; while a non-Macau incorporated company’s profit would be subject to corporate tax if any of the related activities are carried out there.’
The tax rates also vary greatly. ‘Currently, the maximum standard corporate tax rates in China, Hong Kong and Macau are 25%, 16.5% and 12% respectively,’ says Jeremy Choi, a tax partner at PwC Hong Kong. ‘In addition, there is no withholding tax on dividends paid to foreign entities in both Hong Kong and Macau, whereas a 10% withholding tax is imposed on dividend income paying out from China.’
Lau notes that, in addition, corporate tax and individual income tax rates are generally higher in mainland China, which also imposes indirect tax on goods and services – for example, through VAT.
According to The Greater Bay Area Initiative – a new report from KPMG based on interviews with 614 business executives – the sectors most likely to benefit from the area’s development are trade and logistics, financial services and research and development (R&D) in innovative technologies. Finding an ideal tax structure to harmonise them is tricky.
‘If there are certain tax incentives for trading transactions among the Greater Bay Area cities – for example, offering a reduced tax rate on the relevant transactions – it can enhance the trade volume within the region,’ Lau says.
Enhanced crossborder movement within the Greater Bay Area is, Lau says, essential for the region’s successful development. ‘We therefore propose adding a specific individual tax exemption clause in Hong Kong’s double-tax agreement with mainland China for academics conducting research in Hong Kong – and vice versa – to encourage crossborder exchange of knowledge,’ she says.
This echoes one of the key recommendations in PwC’s recent report, New Opportunities for the Guangdong-Hong Kong-Macau Greater Bay Area: to improve crossborder tax policies via bilateral agreements. PwC’s report also suggests that the mainland government should allow Hong Kong companies to set up branches in the Greater Bay Area to reduce their financing and tax burdens in the mainland.
‘We recommend allowing a Hong Kong company’s permanent establishments in mainland China to be subject to China’s corporate tax at a reduced rate of 16.5%,’ Choi says.
Agnes Wong, a tax partner at PwC Hong Kong, says addressing the needs of individuals is just as important. ‘One of the options that we have suggested is that the income of Hong Kong residents who work or are stationed in the mainland side of the Bay Area could be subject to a reduced China individual income tax capped at 15% in the mainland,’ she says.
‘For those who live in Hong Kong and work for an employer there but frequently travel for work in the mainland, we suggest that they could be subject to Hong Kong salaries tax only.’
Wong also suggests that the governments enter into a social security agreement, so Hong Kong residents making contributions to the Mandatory Provident Fund scheme are exempt from social contributions in the mainland. This could, she suggests, be applied to Macau as well.
Lau suggests that each city should identify its core competitive advantages and explore ways to complement one another.
‘One possible approach is to offer tax incentives to encourage R&D activities to be conducted in Shenzhen, Hong Kong or Guangzhou, and manufacturing activities to be carried out in Dongguan and other cities across the Pearl River Delta,’ she says, adding that KPMG is particularly excited about Hong Kong’s role in the area.
‘We propose introducing a regional headquarters tax incentive to enhance Hong Kong’s attractiveness as a location for regional headquarters providing professional services to overseas group companies, complementing the tax incentive introduced last year for corporate treasury centres,’ Lau says.
‘Hong Kong’s asset management sector will play a vital role in supporting wealth management,’ she adds. ‘Furthermore, corporations in the area could also use it as the gateway between China and the world, and as an international financial centre for fundraising, asset and risk management services – for example, for outbound investments in Hong Kong.’
Lau also proposes extending the current offshore private equity funds tax exemption to cover investments in private companies with substantial operations in Hong Kong.
Beyond taxes, Lau concludes, more cooperation is vital. ‘The most pressing issue is for local governments within the region to collaborate on a broad range of topics.’
David Ho, journalist
"If there are certain tax incentives it can enhance the trade volume within the region"
"Enhanced crossborder movement within the Greater Bay Area is essential for the region’s successful development"