Thoughts from the Fiscal Front
Be Innovative in Building the GBA

The Guangdong-Hong Kong-Macao Greater Bay Area (GBA) covers nine cities in Guangdong Province – Dongguan, Foshan, Guangzhou, Huizhou, Jiangmen, Shenzhen, Zhaoqing, Zhongshan and Zhuhai – and the Hong Kong and Macao SARs.

The GBA implements a “one country, two systems and three custom zones” policy, which includes three different kinds of tax and legal frameworks. With the increasing mobility of goods, capital, people, technology and information, the GBA is expected to become another globally significant bay area in the next decade, rivalling those in Tokyo, New York and San Francisco.

Under the Outline Development Plan for the GBA released on 18 February, local governments in the GBA will strategize the cooperation among the three jurisdictions. In particular, HKSAR should reinforce and improve its position as the international financial, shipping and trading centre. Eight further policy measures affecting Hong Kong’s role in the GBA were released on 1 March.

Hong Kong Chief Executive Carrie Lam welcomed these Eight Measures for taking forward the development of the GBA. Such measures could facilitate Hong Kong residents to work and reside in the Mainland cities. The HKSAR is working with relevant central ministries and the governments of Guangdong to jointly draw up measures and strengthen business cooperation, port operations and talent mobility within the area.


Strengthen tax incentives and enhance business environment 
Under the prevailing Chinese tax laws and regulations, when employees of foreign companies render services in the Mainland for a period exceeding 90 days within any 12-month period for the same or a connected project, it is deemed as a permanent establishment in the Mainland and the profits derived therefrom should be subject to PRC Enterprise Income Tax.  

Although the relevant period was extended from 90 days to 183 days under the Tax Arrangement between the Mainland and Hong Kong (DTA), enterprises doing business in the Mainland need to be vigilant to avoid unintentionally creating taxable presence in the Mainland. This potential tax burden may deter Hong Kong businesses and entrepreneurs from expanding into the Mainland market.  

The Eight Measures provide a new definition of a “China Day” when calculating 183 days for paying individual income tax in the Mainland. Under the new definition, visits to the Mainland of less than 24 hours will not count as a day of presence in China.  Another new measure includes tax relief for non-Mainland (including Hong Kong) high-end talent and talent in short supply.  

These measures certainly make the Mainland GBA cities a more attractive place to work and live for Hong Kong residents.  

To further promote business within the area, the HKSAR and the Chinese government authorities are advised to introduce more relaxed tax measures, such as further extension of the relevant period of 183 days or even tax exemption for Hong Kong companies creating a taxable presence within the GBA. Meanwhile, the HKSAR could also provide reciprocal treatment to enterprises from those nine Guangdong cities within the GBA.

Introduce frontier zone clause to enhancetalent mobility
The HKSAR could also consider introducing a “frontier zone” clause to the DTA to encourage Hong Kong residents to live and work in the GBA. A frontier zone clause refers to people who live in one jurisdiction while working in another. According to the current tax regulations, foreign residents (including Hong Kong residents) who spend more than 90 or 183 days (depending on the arrangement between China and the country where they are tax resident) consecutively or cumulatively inside Mainland China will be considered as PRC tax residents and liable to PRC individual income tax. 

Frontier zone clauses have already been introduced in the European Union – for example on the Belgium-Germany border and Switzerland-Germany border – to remove the obstacles to the free movement of frontier workers. Similar arrangements could be introduced to the DTA covering Hong Kong territory and the nine Mainland cities within the GBA to encourage cross-border mobility. 

Simplify customs clearance procedure for trade convenience
On 14 December 2018, a new agreement regarding trade of goods was signed between the HKSAR and the Mainland under the framework of the Closer Economic Partnership Arrangement (CEPA). The new agreement has a dedicated chapter on “Trade Facilitation Measures in the Guangdong-Hong Kong-Macao Greater Bay Area” to implement more convenient customs clearance modes at the control points of the GBA to promote the efficient flow of goods. The governments will also strengthen cooperation and impose measures to facilitate trade convenience and efficiency.  

The Eight Measures also mention expanding the implementation scope of the connection with the Speedy Customs Clearance between customs administrations within the GBA. This will reduce duplicate inspections on the same shipment and help to streamline the clearance process and expedite the flow of transshipment cargo.

With the rolling out of the Guangzhou-Shenzhen-Hong Kong high-speed railway and the Hong Kong-Zhuhai-Macao Bridge, the governments could discuss and implement more facilitation measures at the borders within the GBA.

Relax foreign exchange control within the GBA to promote capital flows
The Mainland has adopted relatively strict foreign exchange rules which probably hinder cross-border capital flows within the GBA. We suggest that the Mainland government could relax foreign exchange control within the GBA to promote the flow of cash. This would facilitate trade and investment for corporates and individuals residing in the area.

The GBA is positioned to be a vibrant economic region and the governments should leverage the advantages of each area. This closer cooperation between the Mainland and the two SARs will definitely facilitate the movement of capital, people, goods and services within the region. With continuing development, it is expected that the GBA will put itself in the same league as the top-ranked international bay areas. 

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