In the 2020 Annual Meeting between the IRD and HKCIPA, the following two issues about the Greater Bay Area (“GBA”) have been discussed which is going to bring significant impact to Hong Kong people travelling frequently to GBA to work:-
Whether the GBA Tax Subsidy will be subject to Hong Kong Salaries Tax
Based on the latest arrangements, an individual has to be employed by a PRC entity in order to benefit from the GBA Tax Subsidy. In other words, the individual will be under Non-Hong Kong employment. In case the individual has to travel between the PRC and Hong Kong to work, under normal circumstances, the GBA Tax Subsidy should be attributable to the employment services of the individual in the PRC, and thus should not be chargeable to Hong Kong Salaries Tax under Section 8(1A)(a) of the Inland Revenue Ordinance.
What should be the appropriate in Hong Kong
It is a normal practice that the GBA Tax Subsidy would only be granted several months after the PRC Individual Income Tax Payment is made. In other words, it is likely that the Hong Kong Individual will pay higher amount of Individual Income Tax first, while receiving the subsidy / refund later. In case Tax credit claim is made on the original higher amount of PRC Individual Income Tax paid, the taxpayer has the obligation to notify the IRD within 3 months after receipt of the GBA Tax subsidy and pay back the Hong Kong Salaries Tax arising from over-claimed tax credit (if any).
Points to note
As COVID-19 has already impacted us for more than 1 year, we can observe that an increasing number of Hong Kong Individuals have decided to work in the PRC continuously for a couple of months without travelling back to Hong Kong due to travel restrictions. As they cannot travel back to Hong Kong every day, they should commence to pay attention to their PRC Individual Income Tax exposure.
In order to encourage their staff to work in the PRC, it is a common practice that the employers of these individuals would bear the additional tax liabilities of these individuals so that the after-tax benefits of the employees would not change. This is commonly referred to as the Tax Equalisation Exercise.
Their first consideration would be whether the GBA Tax Subsidy is available to their staff, which will effectively reduce the amount of PRC Individual Income Tax liabilities to similar level as their current Hong Kong Salaries Tax. Each of the nine PRC cities in the GBA has its own rules and procedures. Individuals should study carefully whether they qualify as High-end Talent or Talent in Short Supply in the city they are working at.
The GBA Tax Subsidy is going to provide significant relief to Hong Kong talents working in the GBA. Stay tuned for our next update on the detailed requirements and the application procedures.
Their second consideration is Calculation of Correct PRC Individual Income Tax liabilities, which could depend on a number of the below factors:-
1. Whether the Individual is domiciled in the PRC or not;
2. The number of days of residence of the staff in the PRC ( < 90 days, 90 - 183 days, > 183 days);
3. Whether the Individual is a top management personnel or a normal staff, etc.
Different formulas apply under different situation. As such, it is important to consult with your tax advisors in the adopt the correct formula in calculating your PRC Individual Income Tax Liabilities and thus the extra costs to the Employers under Tax Equalisation Exercise.
Last but not least, the employers should also be aware of their Permanent Establishment (PE) Risk in the PRC due to the substantial activities performed by their staff in the PRC. The Corporate Income Tax Liabilities arising from PRC PE would far exceed the additional costs on Staff compensation under Tax Equalisation Scheme. Corporations should thoroughly examine Article 5 of Double Taxation Agreement between the PRC and Hong Kong on the definition of PE to structure their operation model.
