SFST's keynote speech at "EU - Hong Kong Engagement Forum: Building a Fair Tax Environment through International Cooperation" (English only)
21.6.2022

Following is the keynote speech by the Secretary for Financial Services and the Treasury, Mr Christopher Hui, at the "EU - Hong Kong Engagement Forum: Building a Fair Tax Environment through International Cooperation" on "Hong Kong as an international business centre: relevance of upcoming tax reform" today (June 21): Thomas (Mr Thomas Gnocchi, Ambassador of the European Union to Hong Kong), distinguished guests, friends of the European Union, ladies and gentlemen, Good afternoon. It's a great pleasure speaking to you today at this taxation reform event organised by the EU Office to Hong Kong and Macao. Allow me to extend my sincere thanks to Thomas and his colleagues for having me here. In fact, my personal engagement with the European Union started more than 20 years ago when I went to INSEAD, and I definitely treasure the continuation and extension of this engagement now in a different and also professional setting. This year, we celebrate the 25th anniversary of the establishment of the Hong Kong Special Administrative Region. As I look back on Hong Kong's journey from July 1997, we have indeed come a long way in strengthening tax co-operation with other jurisdictions, and notably the EU member states. While our first-ever comprehensive agreement for avoidance of double taxation, or CDTA in short, was signed with the Mainland of China in 1998, our first CDTA with a foreign jurisdiction was signed with Belgium in 2003. Indeed, nearly one third of our CDTA partners are members of the EU. In the multilateral context, we joined the Global Forum on Transparency and Exchange of Information for Tax Purposes in 2009 and the OECD/G20 Inclusive Framework on BEPS (base erosion and profit shifting) in 2016. Riding on these bilateral and multilateral tax treaties which have entered into force in Hong Kong, we have been exchanging tax information with other jurisdictions in accordance with international protocols. This fully demonstrates Hong Kong's commitment to shouldering our responsibilities as an international financial centre with regard to international tax co-operation. What's past is prologue. Then comes the question of what's next. The glimpse that I have just given you of Hong Kong's journey in international tax co-operation is highly relevant to the primary topic today - international taxation reform. With tax challenges arising from the digitalisation of our globalised economy, Hong Kong cannot operate on its own. We need to gear ourselves up in the face of new challenges in international taxation and join hands with other jurisdictions. It is against this background that Hong Kong and more than 130 jurisdictions around the world reached a landmark deal in October last year to embark on an ambitious international tax reform, that is BEPS 2.0. Hong Kong is fully committed to implementing the two-pillar solution according to the international consensus, including the introduction of a global minimum effective tax rate for multinational enterprise groups. The BEPS package aside, we also support international efforts in combatting cross-border tax evasion, which is, indeed, a subject dear to my heart. Hong Kong has all along adopted the territorial source principle of taxation, whereby offshore profits are generally not subject to profits tax in Hong Kong. As our EU counterparts have emphasised, there is nothing wrong with a territorial tax system per se. That said, we understand the concerns of the EU regarding the possible risks of double non-taxation arising from the tax exemption of offshore passive income granted to corporates with no substantial economic activity in Hong Kong. Since last October, we have been actively reviewing and identifying refinements to Hong Kong's foreign source income exemption regime (FSIE regime) with a view to ensuring that companies will not be able to exploit Hong Kong's tax regime to evade tax for passive income by setting up shell entities with no economic substance in Hong Kong. In identifying appropriate refinements to our FSIE regime, we have made reference to tax standards promulgated internationally and by the EU member states. We have also striven to strike a balance between achieving the objective of tackling double non-taxation risks and upholding the simple, certain, fair and transparent features of our tax regime, which have served us well over the years. We have now finalised a package of proposed refinements, and are pleased to receive endorsement in principle from the EU Code of Conduct Group about the package of refinements. Our target is to introduce a legislative proposal to implement the said package of refinements to the Legislative Council for scrutiny within this year. When implementing the proposed refinements to our FSIE, we will take care to minimise the compliance burden on corporates. At the same time, we are also keen to maintain the competitive advantages of our business environment. These include our low tax rate and the simple, certain, fair and transparent features of our tax system which I mentioned just then. In this regard, let me reassure the local and international business communities, including all of you here today, that the territorial source principle of taxation remains a core part of Hong Kong's tax system and will be here to stay. To engage the business community, we have issued a consultation paper setting out the directions of the refined FSIE regime and seeking views on how best to minimise the compliance burden for taxpayers. We look forward to receiving your feedback. Greater involvement in international tax co-operation goes hand in hand with Hong Kong's growing connectivity with other economies. Needless to say, Hong Kong and the EU member states maintain very close economic and trade connections. The EU has been a major source of foreign investment in Hong Kong, and Hong Kong has also been a popular foreign direct investment destination for the EU. The EU is our third-largest trading partner, with bilateral trade increasing over 16 per cent last year. Some 1 600 the EU companies maintain an office here in Hong Kong, while more than half of them have based their regional headquarters or regional offices in our city. All these tell us how much Hong Kong is welcomed by the EU member states, and how much we value economic co-operation with the EU. A key aspect of our economic relationship with the EU is financial services. We have always welcomed the EU entities to take advantage of our excellent financial and professional services for investment and financing, apart from our competitive tax regime. Hong Kong has a highly open and internationalised market, a regulatory regime aligned with major overseas markets, the unique advantage under "one country, two systems", a legal system upholding the rule of law, a rich pool of professional talents, a robust infrastructure, and the free flow of information and capital. These are unparalleled competencies that are well recognised by the international community. They have allowed us to be China's gateway to the world's financial markets and investors, and also an ideal gateway for international businesses to tap into the Mainland market. With these distinct and diversified advantages in mind, we are fully confident that Hong Kong will remain to be an attractive and promising destination for trade and investment. Business opportunities for our EU partners in Hong Kong are vast. The National 14th Five-Year Plan acknowledges the significant functions and positioning of Hong Kong in the overall development of the country. It supports Hong Kong to enhance its status as an international financial centre, and strengthen its position as a global offshore Renminbi (RMB) business hub, an international asset management centre and a risk management centre. The Plan also allows Hong Kong to leverage the enormous opportunities presented by the Greater Bay Area to contribute to the opening up of the country, and to promote the sustainable development of the financial sector. Development of green and sustainable finance in Hong Kong is one of our key objectives in recent years. We have been promoting the issuance of green bonds in Hong Kong by different types of issuers. For instance, the Shenzhen Municipal People's Government issued offshore RMB municipal government bonds totaling RMB5 billion, including RMB3.9 billion of green bonds, in Hong Kong last year. This was the first time a Mainland municipal government issued bonds in Hong Kong. As for private enterprises, we have launched the Green and Sustainable Finance Grant Scheme to subsidise them on costs for issuance and external review. For the Hong Kong Government ourselves, so far we have issued under the Government Green Bond Programme a total of US$10 billion worth of green bonds, targeting both global institutional and retail investors, and covering US dollar, Euro, RMB and HKD tranches in multiple tenors. They have been well received by investors, manifesting confidence in Hong Kong's credit strengths and our commitment in green transformations. We will continue with our efforts to promote green bonds and other green and sustainable finance in Hong Kong, with a view to helping our country achieve its "3060 Dual Carbon Targets" in relation to carbon emission peak and carbon neutrality, and our own goal of achieving carbon neutrality by 2050. We certainly welcome businesses from around the globe, in particular Europe, to work with us and make use of Hong Kong as their green finance base. Hong Kong also remains to be an attractive listing venue for companies around the world, including the EU member states. Last year, Hong Kong raised a total of over US$42 billion of funds through IPOs, continuing to be one of the leading fund raising hubs around the globe. We spare no efforts to strengthen Hong Kong's position as a fundraising platform. To this end, we have launched a listing regime for special purpose acquisition companies to broaden the source of listing in Hong Kong. Also, with due regard to risks involved, we will examine the revision of listing requirements to meet the fundraising needs of large-scale advanced technology enterprises, which require substantial capital for their R&D work, but not yet meeting the existing profit and trading record requirements. Our robust and vibrant financial market is well recognised and has always been operating under a well-established regulatory framework. With such infrastructure, I am confident Hong Kong will continue to capitalise on our unique advantages and offer business opportunities to our overseas partners. May I invite you all, my European friends, to join us in achieving greater business connectivity. Given our small and open economy, Hong Kong has never lost sight of the goal to stay connected with the rest of the world and serve businesses from around the globe. We definitely treasure our relationship with our friends in Europe and look forward to our continuing partnership in future. My special thanks again to the organiser - the EU Office to Hong Kong and Macao - for giving me this opportunity to speak to you all today. May I wish you the best of business and health. Thank you.