Significant changes to the elimination of double taxation in Hong Kong
For the 2018/19 tax year ending 31 March 2019 there are significant changes to claiming relief from double taxation for salaried tax payers.
In the past, for those Hong Kong salaried tax payers who have double taxation issues, subject to certain conditions, they had an option to adopt either of the following methodologies to eliminate double taxation:
- To apply for an “income exclusion claim” under the section 8(1A)(c) of the Inland Revenue Ordinance (“IRO”), which is a domestic unilateral measure; OR
- To apply for a “tax credit claim” under the relevant Comprehensive Double Taxation Agreement (“CDTA”), which is a bilateral measure.
In most cases, since the “income exclusion claim” would generate a more favourable tax outcome, most of the salaried tax payers would apply for the “income exclusion claim” even if the “tax credit claim” is in place and available to these salaries tax payers.
New Tax Legislation
New tax legislation was gazetted on 13 July 2018. Starting from the year of assessment 2018/19 (that is, covering the tax period from 1 April 2018 to 31 March 2019), if a CDTA is in place and available to a double-taxed salaried tax payer, the salaried tax payer is no longer allowed to apply for the “income exclusion claim”, instead, the salaried tax payer may only apply for the “tax credit claim” to eliminate double taxation.
In addition to the above change, the new tax legislation also introduced the following changes:-
- To extend the time limit for claiming a foreign tax credit from 2 years to 6 years;
- To require the salaried tax payers to take all reasonable steps and make use of the possible reliefs under the CDTA or under the foreign jurisdiction’s local legislations in minimizing the foreign tax payable before claiming a foreign tax credit; and
- To require the salaried tax payers to notify the Commissioner of Inland Revenue regarding any subsequent adjustment of their foreign tax payment within 3 months after the adjustment is made.
Who is affected?
All Hong Kong tax residents who are currently working in the CDTA jurisdictions will be affected.
In brief, the new tax legislation will impose an additional tax administration burden to the tax payers if they wish to claim a tax credit on their tax returns in future.
These taxpayers are now required to make a self-assessment on their tax resident status on an annual basis, and at the same time, they are also required to make a declaration to the IRD on a timely basis if there is any prior-year tax adjustment subsequently made.
Last but not least, their overall salaried tax liability may be increased as the “income exclusion claim” (i.e. which would normally generate a more favourable tax outcome) is no longer available to them.
What action is required?
In order to mange risks of non-compliance, and unexpected increases in tax liabilities both employers and affected individuals will want to perform a review the new rules as soon as possible. In particular, establishing the Hong Kong tax resident status under the new rules; determining whether there would be any increase in tax liabilities; and to understand the requirements and administrative procedures for applying a “tax credit claim” in future.