Hong Kong SAR: A look at the US executive order on shipping tax
Lewis Lu and John Timpany of KPMG China analyse the impact of the US executive order on shipping taxes for Hong Kong SAR.
The US government notified Hong Kong SAR of its decision to suspend or terminate the agreement for double taxation relief in respect of income from the international operation of ships. The agreement had been in effect since 1989.
It is not immediately clear from the statement issued whether the agreement has been terminated or suspended, however, the terms of the agreement only provide for termination. No notice period is set out in the terms of the agreement, which may mean that it ceases to have effect immediately.
As a result of this, the US and Hong Kong SAR ship operators no longer enjoy an exemption from the taxes of the other jurisdiction when sailing into or out of the relevant territory. In the case of the Hong Kong SAR ship operators visiting the US, this may mean that they become subject to a 4% tax on their US gross transportation income (USGTI). In many cases, USGTI is 50% of the non-US corporation’s shipping income pertaining to its voyages to, or from, the US.
Interestingly, this puts Hong Kong SAR ship operators in a comparatively worse position than ship operators from mainland China, which has a double taxation agreement with the US. This would seem to be inconsistent with the broader policy intent expressed by the US administration to treat Hong Kong SAR as a part of the mainland for a range of purposes. Furthermore, the scope of the mainland treaty does not extend to Hong Kong SAR.
Exemptions under US domestic law may continue to apply to exempt certain ship operators, depending on where they are organised and who their owners are. One of the conditions for the US exemption is whether the ‘country’ where the operator is organised grants an equivalent exemption from tax to US companies. The US has historically treated Hong Kong SAR as a separate country for the purposes of the US Internal Revenue Code (see Notice 97-40).
It may therefore be possible if the Hong Kong SAR government were to grant a unilateral exemption to US shipping that the termination or suspension of the shipping agreement would have little practical effect on Hong Kong SAR ship operators coming into or out of the US, although US policy in respect of Hong Kong SAR remains in a state of flux and it is possible that there may be further changes.
Affected operators should consult tax experts to determine whether they are eligible.
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