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

The European Parliament raises concerns over unanimity in voting on pillar two, while protests break out over tax reform in Colombia.
Ramesh Khaitan speaks to reporter Siqalane Taho about tax morality, transfer pricing regulations, Indian tax developments, and the OECD’s two-pillar solution.
Join ITR and KPMG China at 10am BST on October 19 as they discuss the personal, employment, and corporate tax-related implications of employees working from overseas.
Tricentis and Boehringer Ingelheim, along with a European Commission TP specialist, criticised the complexity of pillar one rules and their scope at an ITR event.
Speakers at ITR’s Managing Tax Disputes Summit said taxpayers can still face lengthy TP audits, despite strong documentation preparation
Gig economy companies in New Zealand will need to fully account and become liable for the goods and services tax of underlying suppliers on their platforms, under new proposals.
Join ITR and Thomson Reuters at 2pm (UAE) / 11am (UK) on October 13 as they discuss how businesses can prepare for Tax Administration 3.0 and future-proof against changes such as e-invoicing and increasing digitisation.
ITR has partnered with global TP leaders from Deloitte to discuss transfer pricing controversy around the globe, and to share advice on how to navigate an increasingly uncertain and risky TP landscape.
Sources say they are not satisfied with pillar one protections in the marketing and distribution safe harbour, even though it was designed to give businesses greater tax certainty.
Political support for qualified majority voting is at a peak as unanimity rules continue to block the European Council from passing a directive on pillar two.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree