All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Hong Kong SAR’s IRD issues guidance on tax issues arising from COVID-19

Sponsored by

sponsored-firms-kpmg.png
The IRD guidance should be welcomed by many businesses

Lewis Lu and John Timpany of KPMG discuss the Inland Revenue Department’s views on COVID-19 and the potential tax implications for taxpayers.

COVID-19 has brought border closures and unprecedented disruption to the global business environment for more than 18 months.  

Many companies have had to change the way in which they operate, and employees have been forced to work in locations outside their usual place of employment.  On July 29 2021, the Inland Revenue Department (IRD) issued guidance examining certain tax issues arising from the COVID-19 pandemic (the IRD guidance). The IRD guidance outlines the IRD’s general views around tax issues relating to tax residence of companies and individuals, permanent establishment, employment income of cross-border employees and transfer pricing (TP).

The IRD’s views and approach in relation to the above tax issues are generally in line with the ‘Updated guidance on tax treaties and the Impact of the COVID-19 pandemic' (the COVID-19 tax treaty guidance) and ‘Guidance on the transfer pricing implications of the COVID-19 pandemic' (the COVID-19 TP guidance) released by the OECD in December 2020 and January 2021, respectively. 

It is worth noting, however, the IRD guidance is not legally binding and only represents the IRD’s general views. Each case will be assessed based on its own facts and circumstances. For a detailed discussion of our comments on the IRD guidance and the OECD Secretariat’s analysis of the impact of COVID-19, please refer to KPMG’s Hong Kong Tax Alerts Issue 8, August 2021 and Issue 6, April 2020 respectively.

The IRD guidance should be welcomed by many businesses as it provides a degree of reassurance for taxpayers that may have employees temporarily stranded overseas a result of these restrictions.

Whilst it is good to see the IRD generally following the OECD’s views, the guidance does not cover situations where potential tax liabilities may arise under domestic tax law due to a change in which businesses are being forced to operate or are managed or controlled during the pandemic. This is particularly relevant for cross-border workers who, habitually travel overseas to perform services or conclude contracts on behalf of their employers, are now being forced to work in Hong Kong SAR because of the travel restrictions. This is a situation commonly faced by many businesses during this period and such taxpayers may have treated part of or all of their profits as offshore sourced and non-taxable.

Given Hong Kong SAR’s territorial system of taxation, the territorial concept fundamentally requires taxpayers to determine the location where the profits are derived and profits which have an offshore source are generally not taxed in Hong Kong.  

Taxpayers with an offshore profits claim may therefore find themselves in a predicament and risk such profits being challenged and regarded as Hong Kong SAR sourced as a result of their employees performing profit generating activities in Hong Kong SAR during the pandemic. Further clarification from the IRD would be welcomed in this regard.

Nevertheless, the IRD Guidance should provide a degree of reassurance for taxpayers in determining their tax positions during the pandemic – if they can apply a double tax agreement. If a double tax agreement cannot apply, the guidance is only helpful in that it confirms that no concession or relaxation will be accepted by IRD.

Notwithstanding the guidance, employers who have employees that are temporarily dislocated should continue to monitor their circumstances and the government travel rules regulations closely to assess whether if it is really a temporarily dislocation as a result of COVID-19 or a matter of choice.

In particular, consideration should be taken that this guidance given by the IRD only applies to the interpretation of tax treaties and the application of transfer pricing principles. The IRD Guidance does not apply to the interpretation of domestic law nor where the dislocation of the employee is by choice, rather than being imposed by restrictions arising from external factors. Taxpayers should tread with caution and work closely with their tax advisors to carefully assess their tax positions during the pandemic. 

Lewis Lu

Partner, KPMG China

E: lewis.lu@kpmg.com

 

John Timpany

Partner, KPMG China

E: john.timpany@kpmg.com

 

more across site & bottom lb ros

More from across our site

Vikas Garg talks to reporter Siqalane Taho about how regulation, technology and the goods and services tax has affected the manufacturing company.
A major shift is underway in tax as the profession transitions from a mostly accounting and finance sector to a hybrid industry that requires significant IT skills, say tax experts.
The Biden administration is about to give $80 billion to the Internal Revenue Service to enhance the tax authority’s enforcement processes and IT systems.
Audi, Porsche, and Kia say their US clients will face higher prices under the Inflation Reduction Act after the legislation axes an important tax credit for electric vehicle production.
This week Brazil’s former President Luiz Inacio Lula da Silva came out in support of uniting Brazil’s consumption taxes into one VAT regime, while the US Senate approved a corporate minimum tax rate.
The Dutch TP decree marks a turn in the Netherlands as the country aligns its tax policies with OECD standards over claims it is a tax haven.
Gorka Echevarria talks to reporter Siqalane Taho about how inflation, e-invoicing and technology are affecting the laser printing firm in a post-COVID world.
Tax directors have called on companies to better secure their data as they generate ever-increasing amounts of information due to greater government scrutiny.
Incoming amendments to the treaty could increase costs on non-resident Indian service providers.
Experts say the proposed minimum tax does not align with the OECD’s pillar two regime and risks other countries pulling out.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree