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Following is a question by the Hon James Tien and a written reply by the Secretary for the Treasury, Miss Denise Yue, in the Legislative Council today (Wednesday):

Question:

At present, international commercial activities conducted by electronic means are increasingly common, and there are reports that there are difficulties in levying taxes on the profits derived from such activities. In this connection, will the Government inform this Council of the difficulties in levying taxes payable in respect of such commercial activities, and of the Administration's plan to overcome such difficulties?

Reply:

President,

Many taxation administrations are considering the implications on their taxation regimes of conducting businesses by electronic means. Important international fora such as the Organisation for Economic Co-operation and Development (OECD) are doing likewise. Some issues already identified which may have relevance for, but not unique to, Hong Kong's Profits Tax regime include:

(a) a change in the characterisation of business transactions, e.g. software which used to be distributed in the form of an ordinary sale and purchase transaction may now be distributed electronically with the end-user paying a licensing fee;

(b) a tendency towards disintermediation, e.g. manufacturers or vendors of goods terminating their physical presence in Hong Kong and operating through a "virtual" shop front;

(c) a possibility of onshore operations moving offshore, e.g. conventional businesses operating in Hong Kong moving, in an e-commerce situation, their server offshore;

(d) a chance of non-taxation, or double taxation, of profits occurring with respect to business conducted electronically because profits may totally escape any liability to tax or be subject to taxation in more than one jurisdiction;

(e) a growing trend for electronic record keeping, transfer pricing arrangements and more complex audit trail, rendering the assessment and verification of tax payable more complicated and difficult; and

(f) a potential burgeoning of new businesses brought about by e-commerce, some of which may give rise to profits liable to Profits Tax.

No uniform approach to resolving these and other issues has emerged universally. With globalisation and the disappearing importance of physical boundaries for businesses conducted electronically, it is important for a consensus approach to be developed and adopted by most taxation administrations so that tax revenues arising from businesses conducted through electronic means may be reasonably and equitably assessed and collected by the relevant tax administrations.

Hong Kong must ensure its approach to taxing profits arising from businesses conducted electronically is consistent with that adopted by our major international counterparts. We need to await the development of international standards and formulate our own guidelines accordingly. In the meantime, we are keeping a close watch on discussions and emerging views in OECD and major taxation administrations. Where appropriate, we participate in discussion groups and seminars organised by OECD on taxation and e-commerce. In addition, the Inland Revenue Department has specifically been tasked with closely monitoring developments in e-commerce, from a taxation perspective, as they arise within Hong Kong. It is also interfacing with taxation practitioners in Hong Kong to identify potential problems and possible resolutions relating to taxation of profits on businesses conducted through electronic means.

End/Wednesday, January 26, 2000

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