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EU General Data of Protection Regulation (“GDPR”)

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Why should an EU regulation, which only becomes applicable on 25th May 2018 have any relevance in Hong Kong today?

The answer is because the GDPR has a global footprint and so, if you already have a company which is registered within the EU or intend to have one incorporated before 25th May 2018, then the GDPR will apply.  The GDPR will also apply to organisations that: (i) do not physically process data in EU but are ‘established’ (i.e. exercise a real and effective activity) in EU, or (ii) do online businesses with representatives in EU countries.  If you have customers who are EU citizens, you will have to comply with GDPR too.

Some legislation provides a “grace period” for implementation, but that does not apply to the GDPR. Besides, GDPR is a regulation, not a directive, it has binding legal force and therefore by 25th May next year, every relevant company must have in place a fully thought through protective environment and protocol for the collection, handling and storage of personnel data.  This includes defining access permission, passwords and data encryption.

Most importantly is the requirement that all unencrypted data breaches must be reported to the relevant national data protection authority (Supervisory Authority) within 72 hours, if not, draconin sanctions are applicable and we are told they will be enforced. This reminds us that there is a real need for every company, especially a company which has a European footprint, to have in place proper and detailed protocols to deal with data breaches and cyber-attacks. Billions of dollars are already lost each year through email fraud and now there is an ever expanding threat of cyber-attack on data, whether through malware, ransome ware or the like.

So, does your company yet have in place plans and protocols that can prevent or reduce the risk of any such cyber-attack?  Has that yet been considered, because after an attack has taken place, it will be too late?

Typically, there should not only be an initial compliance plan to monitor the risk of any such attack, but there then needs to be an instant response plan. From a legal point of view, there will also be the questions of whether law enforcement agencies are required to investigate and prosecute, so when should the incidents be reported, how should the reporting be performed, what evidence should be collected and how should that evidence be collected? Part of this process will be the required communication response to reduce reputation risk. The World is becoming more and more international and so there is a greater threat to business through an increasing reliance on e-commerce and continuity in cyber space.

OLN in Hong Kong and through its international network of Law Firms can assist in this area. Should you want more information, please do not hesitate to contact Stephen Chan at stephen.chan@oln-law.com.

HK firm OLN marks 30 years

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Hong Kong firm Oldham, Li & Nie (OLN) celebrates its 30th anniversary this month. John Kang talks to founding partner Gordon Oldham about his firm’s biggest growth, achievements and challenges in the past three decades.

ALB: What have been some of the most significant achievements for Oldham, Li & Nie?
Oldham: From my point of view, our most important achievement is reaching the point where we are now able to attract high calibre partners and associates to help grow the firm and widen our business base. The light bulb moment came when we realised that to grow, we had to upgrade the skills of our people. They say A-Grade people hire up, B-Grade people hire C-Grade people and C-Grade people don’t hire at all! We put this into practice and have attracted local and international talent who felt being a small cog in a big wheel, undertaking the 16-hour days, at large law firms wasn’t for them. Creating opportunities and an environment for capable people who want to shine in their own right has been very important to our business strategy.

ALB: In which practice areas are you seeing the biggest growth, and what has been driving it?
Oldham: We are mostly a business-centric firm and, of course, the key to such is a deep knowledge of accounting and finance. Being Hong Kong based, a lot of our work involves overseas and cross-border business transactions. Because of this, we created a tax department where our partners and associates are dual-qualified in both law and accounting. Indeed, tax and business advisory as well as our digital business group are driven by our focus on business related matters. Although, curiously enough we are also seeing continued growth in our matrimonial department given the financial implications of divorcing!

Needless to say, the untiring ability of tax authorities around the world to make tax more and more complicated has increased the need for familiarity with international tax regimes. Furthermore, the increase in business transactions undertaken digitally has dictated that we seize opportunities ahead of the curve. The advent of Bitcoin, ICOs and other digital exotica means we have to be in a constant learning mode and anticipate what is coming next.

ALB: What were some of the biggest challenges for OLN?
Oldham: The biggest challenge for most businesses is the transition from an entrepreneur-led enterprise to a fully-fledged business. OLN has brought in human resources managers who introduce skill sets – people managing – that lawyers aren’t necessarily always gifted with! In addition, having someone acting as the CEO, dedicated to the development of the firm as a business, has been hugely significant for us. It is surprising the number of firms that believe they can grow without the specific skill sets that one finds in a business development manager, human resources manager and CEO.

ALB: How has the Hong Kong legal market evolved in the past three decades, and how did OLN adapt?
Oldham: In common with business in general, the internet has democratized the Hong Kong legal market and taken away a lot of the issues that was previously associated with it.  

We adopted a long time ago, not necessarily refined but certainly applicable mantra “Practical Legal Solutions – On Time – No Excuses”. The emphasis has always been on providing practical solutions that understand and address the clients’ needs. This practical approach arose from actually listening and adapting to our clients’ requirements!  


ALB: What’s next for OLN? What are you most optimistic and not optimistic about?
Oldham: What I am optimistic and excited about is our ability to thrive and grow. We will continue to pursue the OLN business strategy of establishing business groups that cater for companies involved in both local and international business and providing these clients with tailored, practical and above all results oriented business solutions.

What I’m not optimistic about is that dispute resolution in Hong Kong seems to be getting slower and slower. Our Judiciary are amongst the finest in the world yet the support that they seem to be getting from the underlying government authorities seems to be sadly lacking. One of Hong Kong’s greatest claims is its adherence to the rule of law and the way that justice is dispensed within a timely and relevant manner. However it’s now embarrassing to say to a client that notwithstanding the fact that they have all of the merits of the case, it may be two or three years before it comes to a trial. It’s not just a question of increasing the number of judges, it’s giving judges more administrative support. Justice delayed is justice denied.

Proposed Tax Measures In 2017 Policy Address

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The Chief Executive, Mrs. Carrie Lam announced in her first Policy Address a wide range of measures with an aim to enhance Hong Kong’s competitiveness and reinforce Hong Kong’s position as an international financial and economic centre. This alert focuses on the tax related measures.
 

A two-tier profits tax system
For the purpose of mitigating the tax burden of Hong Kong enterprises (particular small and medium-sized enterprises (“SMEs”), a two-tier profits tax system is introduced. Under the proposal, the profits tax rate of the first HK$2 million of profits of enterprises will be lowered to 8.25% (i.e. half of the standard profits tax rate), and profits above will remain to be taxed at the standard profits tax rate of 16.5%. 

To avoid abuse and ensure that the tax benefits will target SMEs which represent 98% of businesses in Hong Kong, it is apparent that there will be anti-avoidance provisions such that only one enterprise of a business group will be eligible for the lower tax rate. The definition of “business group” is nevertheless to be clarified at a later stage.
 

Super deduction for research and development (“R&D) expenditure 
A super deduction for R&D expenditure is introduced to encourage more private expenditure on R&D and innovation and technology development. It was proposed that the first HK$2 million eligible R&D expenditure enjoy a 300% tax deduction with the remaining at 200%.
 

Expansion of double taxation agreement (“DTA”) network
The Chief Executive expressed in the Policy Address the Government’s objective to expand Hong Kong’s DTA partners from currently 38 to 50 (especially those along the Belt and Road) over the next few years.

Based on the current available information, it goes without saying that SMEs, start-up enterprises and innovation and technology enterprises will be the most beneficial parties from the Policy Address in tax perspective. Having said that, the extent of tax benefits to which they can enjoy heavily depends on the drafting of the relevant legislation such as qualifying criteria, application process, anti-avoidance provisions, etc.

For a detailed discussion or any enquiry, please contact one of our members of the Tax Advisory team.

The Impact of BEPS on the Hong Kong Tax Environment

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What is BEPS?

There is no doubt that Base Erosion and Profit Shifting (“BEPS”) is a hot topic on the international tax policy agenda.

BEPS, which refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, has always been a major concern of international bodies such as the Group of Twenty (“G20”) and the Organisation for Economic Co-operation and Development (“OECD”).

The BEPS package, comprising 15 action plans which seek to realign taxation with economic substance and value creation while preventing double taxation, was first launched by G20 and OECD in 2013.

To ensure a consistent and effective global approach, G20 and OECD have called on all countries and jurisdictions to join the inclusive framework for implementation of the BEPS package. Being an international financial centre and a responsible member of the international community, Hong Kong indicated to OECD in June 2016 our commitment to the BEPS package and its consistent implementation.

The below highlights how BEPS has impacted and substantially changed the Hong Kong tax environment.

1) Automatic Exchange of Financial Account Information (“AEOI”)

The Legislative Council has recently passed a bill amending the Inland Revenue Ordinance to further implement the AEOI arrangement.

The AEOI arrangement is depicted below:-

As at the end of July 2017, there are 75 reportable jurisdictions (which are continuously expanding), including the United Kingdom (“UK”) and France.

When fully implemented, the AEOI arrangement will have without any doubt profound impacts on taxpayers. For example, for an UK tax resident who has a bank account in Hong Kong, the following is going to happen:-

  • HKIRD will collect and forward the UK tax resident’s financial information to the UK tax authority (the first exchange is due to commence by the end of 2018 on the condition that the necessary domestic legislation would be in place by 2017);
  • Other jurisdictions (which have entered into similar AEOI arrangements) in which the UK tax resident has maintained financial accounts will also collect and forward the UK tax resident’s financial information to the UK tax authority; and 
  • The UK tax authority will tax the UK tax resident on his / her worldwide income based on the information provided (if not already taxed). 

Action required by taxpayers

To assess the AEOI impact and reconsider his / her tax residency.

Please refer to our article dated 21 March 2017 for a detailed discussion of the AEOI arrangement.

2) Additional Transfer Pricing documentation requirement

Typical cross-border intercompany transactions of businesses with presence in more than one tax jurisdiction are depicted below:-

(1) The administrative function (such as IT, human resources etc) will be managed by the Group Company on a centralised basis and the Group Company will charge its overseas subsidiaries (HK Company and other overseas company) management fees for the provision of the administrative services.

(2) In cases where the Group wishes to take advantage of the lower tax rate in Hong Kong (for example, in case that the Group has an active business in Japan which has an effective tax rate of 34% compared with the effective tax rate in Hong Kong of 16.5%), the Group can arrange for the Hong Kong Company to own the relevant intellectual properties of the Group and impose royalties fee on the grant of the license to the Japanese company. That way the profit generated by the Japanese company will be diverted to Hong Kong Company.

To tackle non-arm’s length intercompany transactions and to counter BEPS, the Hong Kong Government has proposed to introduce a new 3-tiered standardised transfer pricing documentation as per below:- 

(1) Local File: Enterprises with cross-border intercompany transactions would be required to keep a local file which provides detailed transactional transfer pricing information such as details of the transactions, amount involved in the transactions and a transfer pricing analysis.

(2) Master File: Enterprises with cross-border intercompany transactions would be required to provide a high-level overview of the group, including documenting the global business operations, transfer pricing policies and global allocation of income.

(3) Country-by-country Report (“CbC Report”): A CbC report should be filed by the ultimate parent entity of a multinational enterprise (“MNE”) in its tax jurisdiction which sets out the amounts of revenue, profits and tax paid as well as certain indicators of economic activity such as number of employees, stated capital, retained earnings and tangible assets for each jurisdiction in which a MNE operates. 

Accordingly, for the above group structure, unless they qualify for the exemption, the local operations in the overseas companies and Hong Kong will each require to submit a local file and a master file. And the parent company will need to submit the CbC report. 

Exemptions to the 3-tiered standardized transfer pricing documentation

For local and master files:

Upon satisfying 1 of the 2 following exemptions:-

(a) Exemption based on size of business

An enterprise which satisfies any 2 of the 3 below conditions will not be required to prepare local and master files:-

  • Total annual revenue not more than HK$200 million;
  • Total assets not more than HK$200 million; or
  • Not more than 100 employees.

(b) Exemption based on related party transactions

If the amount of a category of related party transactions for the relevant accounting period is below the proposed threshold, an enterprise will not be required to prepare a local file for that particular category of transactions:-

  • transfer of properties (other than financial assets and intangibles): HK$220 million;
  • transaction of financial assets: HK$110 million;
  • transfer of intangibles: HK$110 million; and
  • any other transaction (e.g. service income and royalty income): HK$44 million.

If the enterprise concerned is fully exempted from preparing a local file, it will not be required to prepare the master file either.

For CbC Reports:

  • Annual consolidated group revenue ≤ EUR750 million (i.e. approx. HK$6.8 billion)

More on CbC Reports

CbC reports are to be exchanged automatically between tax authorities of different jurisdiction of which Hong Kong has concluded a Comprehensive Double Taxation Agreement (“CDTA”) and and Tax Information Exchange Agreement(“TIEA”) with, including China and the United States.

Action required by taxpayers

  • To review the arm’s length basis of the intercompany transactions and conduct transfer pricing analysis.

(3) No More “Tax Treaty Shopping”?

The development of a multilateral instrument

It is beyond doubt that “tax treaty shopping” is an important source of BEPS. Rather than making amendments to each bilateral treaty (with more than 3,000 bilateral treaties around the world), the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Multilateral Instrument”), one of the outcomes of the BEPS Project, operates to modify tax treaties between two or more parties to the Multilateral Instrument in a synchronised and efficient manner. It will not function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the treaty; instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures. 

The Multilateral Instrument, however, does not modify all tax treaties in the same manner. Apart from the minimum standards (namely the prevention of treaty abuse including defining a company’s taxable presence in a tax jurisdiction (Action 6 of the BEPS action plans) and the improvement of dispute resolution (Action 14 of the BEPS action plans)) which can be satisfied in different ways, the Multilateral Instrument is a flexible instrument which will modify tax treaties according to a jurisdictions’ policy preferences with respect to the implementation of the tax treaty-related BEPS measures.

As of 11 July 2017, 70 jurisdictions (including China and Hong Kong) have signed up for the Multilateral Instrument, with additional jurisdictions expressing their intention to sign the Multilateral Instrument or already preparing for signature of the Multilateral Instrument.

How does the Multilateral Instrument impact on the CDTAs?

Apart from the double tax arrangement with China, all of the CDTAs with 36 countries would be covered by the Multilateral Instrument.

In brief, Hong Kong has chosen to-opt in with respect to the provisions of the Multilateral Instrument that represent the minimum standards and has chosen to-opt out with respect to other provisions that are not mandatory. In particular, Hong Kong has indicated that it will adopt the principal purposes test rule which means that the treaty benefit should not be available where one of the principal purposes of arrangements or transactions is to secure a benefit under a tax treaty and obtaining that benefit in these circumstances would be contrary to the object and purpose of the relevant provisions of the tax treaty.

Action required by taxpayers

  • To assess whether their business operations in Hong Kong do have proper business purposes in order to continue to enjoy the treaty benefits available under the relevant double tax agreements.

For a detailed discussion or any enquiry, please contact one of our members of the Tax Advisory team.