TNAG-0606-FCO40-754-Monitoring-progress-made-on-planning-papers-on-Hong-Kong-1977 — Page 18

companies. This will occur because the interest rate on capital inflows is set by world markets and so the rate of interest churged to Hong Kong borrowers would have to rise. Unfortunately, the report gives no idea of the potential gain in revenue from tuxing loans which are routed through offshore havens as against the potential cost to bona fide borrowers on the Euro or Asia dollar markets.

5. For the taxation of profits the problens arise from transfer pricing whereby companies sell their output to overseas subsidiaries (located in tax havens) at less than market value. The subsidiary then sells to the final destination at market prices. Much of the profit made by the "ong Kong: company has been transferred to the tax haven and can be remitted back to Hong Kong free of tax. An alternative device is to ensure that the contract for a particular sale is made in a bay haven. The profit on the contract is then held to accrue in the tax haven. The common feature of these devices is that the overseas subsidiary does no work to justify the profit.

6.

The Report suggests that, where on oversens subsidiary of u Hong Kong company does not materially mist in producing the profit then the profits of the oversens subsidiary should be liable to Hong Kong baxation. Whin is likely to be the most unpopular of the proposed changes. It is likely the international banks would be particul rly hurt hit by the propos: 15. Currently many

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international banks use flom; Kon

Hom; Kon ng bhe administrative base for arranging long which are then ride o fshore. The profit on the loan is thus made outside Hong Kong. This maybe inequitable but there is competition for these banking offices from other countries (Singapore, Philippines) which are prepared to offer very low tax rules on offshore profits.

llowever,

7. The original purpose of the exemption was to encourage the entrepot trade and also the establishment of company headquarters in Hong Kong. The location of a headquarter buse would not result in a tax liability or oversens subsidiaries. To a growing extent the provisions have acted as a hidden export subsidy, for it is the exporting companies which have the most scope for transfer pricing arrangements. A move to Lax those profits yould lessen the attractiveness of Hong Kong as in buse for exporting. the exporting companies (and their shareholders) are faced with low rates of taxation and it seems unlikely that manufacturing companies would leave if such legislation were introduced. hat is lacking

from the report is any attempt to quantify the extent of revenue loss from either transfer pricing abuses or from other related abuses and to set these gains against the likely loss to long Kong resulting from the potential withdrawal of companies who use Hong Kong as a tax haven. Come commentators hove suggested that the proposed legislation would be ineffective.

17.

The