Hong Kong Services for Mainland’s Outbound Investment (7): Effective Tax Planning a Prerequisite for “Going Out”
HKTDC Research | 29 Sep 2015
Hong Kong Services for Mainland’s Outbound Investment (7): Effective Tax Planning a Prerequisite for “Going Out”
China has gradually become a net capital exporter with its outbound direct investments recently surpassing foreign investment into the country. Jane Hui, a Hong Kong accountant specialised in corporate mergers and acquisitions (M&As), restructuring and tax planning, reckons that the mainland enterprises involved in such activities will need effective professional services support, notably tax planning. This will help them achieve efficient use of investment capital, as well as long-term, sustainable development goals for their outbound capital investments. With China’s Belt and Road Initiative set to facilitate this “going out” activity, this will further stimulate professional services demand and provide tremendous business opportunities for Hong Kong players.
Diversified Investments Sustained by Professional Services Support
Hui is a partner of Ernst & Young[1] accounting firm. She told HKTDC Research, “China’s private enterprises are continuously growing in strength, being an increasingly important source of the country’s overseas investments. Early stage investments had previously focussed on energy and mineral resources. Now, the focus has changed, with greater emphasis on technology, real estate, financial services, agriculture, the medical sector, etc. This has broadened China’s outbound investment portfolio, while eliciting demand for a wide range of professional services in order to support the increasingly frequent and complicated global aspirations of the enterprises.”
Hui pointed out that many mainland enterprises are focussed on their capital costs when “going out”. Although the importance of investment risk control is starting to be recognised, many enterprises are not yet aware as to how international tax arrangements can impact their overseas investments. This is despite the fact that taxes may directly affect their capital use efficiency and unnecessarily raise the cost burden of the whole investment project.
She said, “Every stage of an overseas M&A project requires an assessment of all the relevant tax factors and their impact. In the early ‘strategic analysis’ stage, a transaction structure, taking into account the tax factors, should be in place in order to properly evaluate the initial value of the potential investment target. Then, at the ‘transaction strategy confirmation stage’, a deeper insight into the investment target’s local tax environment, along with any bilateral tax agreements with China or other regions could ensure any transaction structure maximising the potential tax benefits. Such an approach could also simplify a number of related components, such as taxes and any stamp duty payable on immovable property transactions. At the final ‘transaction realisation’ stage, assessing the tax costs of different financing formats in line with other financial due diligence procedures will help establish comprehensive financial and tax structures for the whole investment project.”
Effecting Tax Planning
Hui further noted that using unnecessarily complicated transactions or company structures to undertake overseas investments would not automatically reduce tax burdens. She said: “Complicated structures may affect not only the investment’s future operational costs and efficiency, but may also create barriers for the investors’ future asset transactions or investment exits.”
With regard to tax burdens, Hui said different countries or regions have different “anti-tax evasion” regulations. If an outbound investment project proved non-compliant with the requirements, the corporate income it generates would still fall under the respective tax net.
China’s income tax laws and related implementation rules, for instance, stipulate that a mainland-funded enterprise established offshore may or may not be required to pay income tax on the mainland, subject to the consideration of a series of relevant factors. These include: the location of ordinary residence of the company directors and senior management; their daily decision-making procedure with regard to operational, financial and human resources matters; as well as the prime assets, accounting and shareholders meeting records storage locations. Company structure alone would not take into account all of these considerations.[2]
Hui believes that in terms of addressing the business environments of different countries, Hong Kong can provide not only tax, accounting, legal and other professional services, but also render considerable support for the many “going out” needs of mainland enterprises. In addition, Hong Kong’s professional services providers are well versed in the tax and regulatory environments of the mainland and overseas markets.
Moreover, Hong Kong has decades of experience in offshore asset management, plus a highly efficient business operation environment and free flow of information, making it well placed to support mainland investors when it comes to effective tax planning and the avoidance of unnecessary tax burdens.
Looking ahead, mainland enterprises are set to “go global” with outbound investments, by capitalising on the Belt and Road Initiative of the central government. This will undoubtedly heighten demand for all kinds of professional services, and present far more business opportunities for Hong Kong’s professional service providers.
[1] Ernst & Young is one of the world’s largest professional services organisations. It has been providing Greater China with professional services for four decades and currently has a 14,000-strong workforce. Apart from its Hong Kong office, Ernst & Young also runs an extensive office network in China. It was among the first group of international professional services organisations to be granted permission to operate businesses in China.
[2] Please refer to China’s Enterprise Income Tax Law and related implementation rules for the mainland’s “anti-tax evasion” regulations.
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