Representatives from Mainland China, the Hong Kong Special Administrative Region (HKSAR) and the Macao Special Administrative Region (MCSAR) signed a framework agreement to form the Guangdong-Hong Kong-Macao Greater Bay Area (GBA), an integrated economic and business hub, in July 2017. 

A formal proposal for the formation of the GBA is expected to be published soon. A variety of challenges and opportunities will arise from investing and doing business in the GBA, from both business and tax perspectives.

The GBA will integrate nine cities in the southern Guangdong Province of Mainland China, the HKSAR and the MCSAR. 

According to statistics in 2016, despite having no more than 5% of the Mainland population, the GBA generated 12% of the annual GDP of the country. The area is in a leading position with respect to financial services, technology and advanced manufacturing, heavy industry and modern services.

The GBA is expected to become another globally significant bay area, rivaling the bay areas in Tokyo, New York and San Francisco. 

Accommodating the different legal and regulatory frameworks that have been implemented in the Mainland, the HKSAR and the MCSAR will require the GBA to adopt a unique operational model to facilitate the convergence and mobility of talent, technology and funding.

The framework agreement sets forth the objectives, principles and focus areas in relation to building the GBA, as well as the requirements for formulating the related regulatory arrangements. Different stakeholders may have different interpretations of the framework agreement. This article looks at the key tax and business considerations from an investor's point of view.

Future cooperation between governments
Under the framework agreement, governments in the GBA will formulate a positioning strategy to ensure cooperation among the three jurisdictions:

• Guangdong Province aims to be a pioneer location in implementing the nation’s “Open Door Policy” and a key driver in economic development. It also aims to build a strong base for technology and innovation, advanced manufacturing and the modern service industry.
• The HKSAR intends to reinforce and improve its position as an international financial, shipping and trading center, strengthen its functions as a global offshore renminbi business hub and global asset management center, drive the development of professional services and innovative and technology businesses, and establish an international legal and arbitration center for the region.
• The MCSAR aims to drive the establishment of a global tourism and recreational center and provide a platform for business cooperation between Mainland China and Portuguese-speaking countries.

The ultimate goal of the GBA is to establish a more vibrant economic region; a location with the highest quality for living, working and visiting; a role model for closer cooperation between Mainland China and the two SARs; and a top-ranking international bay area.

Investors should give careful consideration to the GBA positioning strategy, and to the business objectives and the corresponding government support offered. 

This includes selection of business location, alternatives for business entry, ways to collaborate with local government and financing models.

Open approach to foreign investment
The guidance on key policies regulating foreign investments into Mainland China mainly consists of the Foreign Investment Catalogue (2017 Edition), the Negative List for Investment in Free Trade Zones and Closer Economic and Partnership Arrangements. In the past, the governments of Guangdong Province and Shenzhen have explored ways to relax the requirements  to encourage foreign investments.  For example, they opened up some businesses where foreign investment previously was restricted in the manufacturing, service and financial industries, and reduced the limitations on foreign investment ratios in the financial and motor vehicle industries in Mainland China. 

The framework agreement emphasizes the importance of building a new, open economic mechanism and a high-quality platform to interface with “high-end” businesses, consolidating innovative resources and facilitating collaboration within the GBA. These requirements should bring more opportunities to Hong Kong investors and businesses in the area. 

Platform building
The GBA will implement the “one country-two systems, three custom zones” principle, which covers the tax and legal frameworks of three jurisdictions. 

The GBA will feature the open approach to foreign investment adopted in HKSAR and MCSAR and, at the same time, will provide investment opportunities in nine fast-growing Mainland cities, as well as free trade zones, development zones and high-technology zones. Each of the cities and regions serves a unique function. The dynamic business environment provides an attractive platform for Hong Kong investors to invest in the GBA, and a number of different investment models. Through the GBA, the Mainland government can also continue to implement industry and market liberalization progressively.

Market integration and environment
Significant market opportunities are emerging as Mainland Chain improves the quality of goods and services produced locally. This will facilitate businesses in the GBA to demonstrate their competitive advantages and contribute to a higher commercial standard. Closer collaboration with the two SARs should also create prospects for a broader market and more employment opportunities. 

The GBA will offer Hong Kong and Macao investors in specialized industries a chance to penetrate the Mainland market in various sectors (professional services, property development, education, healthcare, elder care, exhibitions, tourism and property management) with the collaboration of the local government. 

Technology innovation center
Innovation is essential for companies that strive for more competitive market positions. It can be demonstrated through technology development, business model optimisation and human resources management. The current tax rules in Mainland China and the HKSAR contain a number of tax policies to encourage local and cross-border innovation and research and development (R&D) activities. 

Policies in the Mainland include a more favorable enterprise income tax rate and an extended loss carryforward period for “high new technology enterprises.” Other policies include an additional income tax deduction for qualified R&D expenditure, incentives to innovation and design enterprises and the implementation of value-added tax (VAT) reform. 

The HKSAR government is also dedicated to implementing a policy for an additional deduction of qualified R&D expenditure, a two-tiered tax rate mechanism, and measures facilitating the listing of biotech companies and companies issuing shares with different rights. All these measures can facilitate Hong Kong investors to invest more in the GBA.

“Go green” initiative
Environmental protection is an area of focus for the Mainland government. With the implementation of the resources tax on pollutants from 1 January 2018, we believe that local governments in the GBA will support projects that protect the environment. From a business perspective, the selection of business, location and compliance with the local government’s requirements on how to enhance the environment protection business are key factors for Hong Kong investors to consider.

Collaboration and co-sharing
Collaborative development within the GBA will involve the refinement of relationships between investors and local governments, and between companies and their customers, which will require alignment with market practices and demands. Local governments will also play a role in driving the initiative. 

More collaborative and co-sharing business models are likely to be developed, and the corresponding operating and tax costs should be fully assessed. These co-sharing business models and tax costs may differ from traditional models. Implementing the concept of co-sharing in the financial and service industries may also help enhance management efficiency and create the potential for the preferential VAT treatment granted to the exportation of services for Hong Kong investors to consider and leverage on.