LCQ2: Restructuring and upgrading of Hong Kong enterprises engaging in processing trade on the Mainland
Following is a reply by the Secretary for Commerce and Economic Development, Mr Gregory So, to a question by the Hon Lam Tai-fai in the Legislative Council today (May 2):
During his visit to Hong Kong in August last year, the Vice-Premier of the State Council, Mr Li Keqiang, announced the Central Government's 36 measures to support Hong Kong's further development. In respect of the support for the stable development and restructuring and upgrading of Hong Kong enterprises engaging in processing trade on the Mainland, the measures include continuing to maintain a consistent policy on processing trade, promoting the establishment of exemplary zones for restructuring and upgrading of processing trade in the Pearl River Delta (PRD) Region, promoting innovative management model, establishing a sound mechanism to facilitate the domestic sales of processing trade, strengthening employment services and guidance, providing financial and insurance support, and encouraging Hong Kong enterprises engaging in contract processing trade to upgrade and restructure. In this connection, will the Government inform this Council:
(a) apart from the proposal to set up a dedicated fund, whether the Government has taken any follow-up and support action in respect of the content of the aforesaid measures to support the stable development as well as the upgrading and restructuring of Hong Kong enterprises, and of the progress and results achieved so far;
(b) whether it will consider allowing Hong Kong enterprises engaging in import processing trade in the PRD Region to submit their claims for depreciation allowances to the Inland Revenue Department of Hong Kong in respect of their machinery on the Mainland and to enjoy the 50:50 basis of tax apportionment with a view to complementing the aforesaid measures to support the upgrading and restructuring of Hong Kong enterprises when studying the promotion of the establishment of exemplary zones for restructuring and upgrading of processing trade in the PRD Region on the Mainland; if it will, of the details; if not, the reasons for that; and
(c) whether it has studied and assessed the difficulties and obstacles faced by Hong Kong enterprises in upgrading and restructuring and in developing domestic sales market on the Mainland at present; if it has, of the details; if not, the reasons for that?
(a) and (c) Hong Kong enterprises have a lot of investments in the Mainland, especially in the Guangdong Province. These investments involve different businesses, and many of them are manufacturing operations in the processing trade. Under the National 12th Five-Year Plan, the Central Government will continue to encourage the upgrading and restructuring of enterprises and to expand domestic demand. During his visit to Hong Kong in August 2011, the Vice-Premier of the State Council, Mr Li Keqiang, announced a series of 36 measures supporting the social and economic development of Hong Kong, which cover a wide range of areas including finance, economy and trade. One of the measures is to support and encourage the stable development and upgrading and restructuring of Hong Kong enterprises engaging in processing trade in the Mainland.
The HKSAR Government has been maintaining a close dialogue with the trade through the Task Force to Support the Processing Trade and other channels, so as to understand their concerns and views. To address the needs of the trade, we have been implementing various measures to assist the Hong Kong enterprises in upgrading and restructuring their operations and promoting domestic sales in the Mainland, so that they can capture the massive opportunities brought by the 12th National Five-Year Plan. The concerns of the trade and the measures we have been implementing include:
(1) Hong Kong enterprises operating in the Mainland have to adapt to changes in Mainland policies and regulations, for example, the adjustment to the minimum wage standard and the implementation of new legislation such as the Labour Contract Law of the People's Republic of China. On various issues of concern to Hong Kong enterprises operating in the Mainland, the HKSAR Government has been maintaining close liaison with the relevant Mainland authorities at central, provincial and municipal levels. Through channels such as meetings of the Committee on Commerce and Trade with the Ministry of Commerce and meetings of the Hong Kong/Guangdong Expert Group on the Restructuring and Upgrading of the Processing Trade with the Department of Foreign Trade and Economic Cooperation of the Guangdong Province, we convey to them the views of the trade and discuss with them measures to support the trade. In addition, the Trade and Industry Department (TID) and our offices in the Mainland also disseminate information to Hong Kong enterprises through circulars and newsletters and organising activities such as symposiums and seminars to keep them abreast of various new policies and regulations and the latest business environment in the Mainland. TID’s website includes a dedicated page on economic and trade information in the Mainland, with hyperlinks to the economic and trade websites of about 200 Mainland authorities. This platform facilitates Hong Kong enterprises in accessing economic and trade information in the Mainland;
(2) The trade requires technical support in upgrading and restructuring their operations and promoting domestic sales in the Mainland. Through organisations such as the Hong Kong Trade Development Council (HKTDC) and Hong Kong Productivity Council, we provide Hong Kong enterprises with support services on technological upgrading, management improvement, branding and market development, etc, as well as information on the Mainland market;
(3) Regarding promoting domestic sales, we understand that the trade needs to understand the relevant markets in the Mainland and also needs a suitable and effective platform to promote their products and brands. In the light of this, we have been organising promotional activities, trade fairs and trade missions to the Mainland through the HKTDC, with a view to enhancing the trade's understanding of the Mainland's policies and market development. In addition, in 2012-13, we have made arrangements for our offices in the Mainland to collaborate with trade associations and other organisations to organise a "Hong Kong Week" in a second-tier city under their respective coverage, in order to promote Hong Kong brands and products, and assist Hong Kong enterprises in building up their brand image and brand awareness in the Mainland market; and
(4) Recently, the trade has reflected to us that their operating environment has become more difficult due to declining orders as a result of the weakening demand in the international market and rising costs of financing and Renminbi appreciation, which have increased the operating costs of businesses, and the impact is particularly evident on small and medium enterprises (SMEs). In order to provide financial support to the trade, we will continue to assist SMEs in market promotion, acquisition of equipment, upgrading of operational and technical skills, and business restructuring or relocation through the existing funding schemes, including the various SME funding schemes administered by TID. In addition, to further assist Hong Kong enterprises in increasing their competitiveness in the Mainland market, the Chief Executive announced in the 2011-12 Policy Address the proposal to set up a $1 billion dedicated fund to assist Hong Kong enterprises in exploring and developing the Mainland market through developing brands, upgrading and restructuring operations and promoting domestic sales in the Mainland. The Government proposes that the dedicated fund should comprise two parts: provide funding support to individual enterprises and to the non-profit-distributing organisations. We have consulted the Legislative Council Panel on Commerce and Industry and plan to seek funding approval of the Finance Committee within this month, with a view to launching the fund by mid 2012.
We trust that through the above measures, we can provide appropriate support and assistance to Hong Kong enterprises in upgrading and restructuring of their operations and promoting domestic sales in the Mainland market.
(b) The Administration has been facilitating the upgrading of Hong Kong enterprises in the Mainland through various supportive measures to assist them to upgrade their technology, enhance their management, promote and develop their brands as well as open up the Mainland market. Nevertheless, in assessing the profits tax of Hong Kong enterprises which have engaged in processing trade in the Mainland, the Inland Revenue Department (IRD) would adhere to the established "territorial source" and "tax symmetry" principles regardless of whether such processing trade is conducted in the exemplary zones for restructuring and upgrading of processing trade in the Mainland. The restriction of section 39E of the Inland Revenue Ordinance and the 50:50 basis of tax apportionment are also based on the above taxation principles.
In fact, the Administration has explained to Members of the Legislative Council on a number of occasions that under the "import processing" arrangement, the Mainland enterprises, which are responsible for the Mainland production activities, are independent legal entities. These Mainland enterprises have to pay for importation of raw materials and for installation of production equipment as needed. The finished products belong to the Mainland enterprises and it is their responsibility to arrange for domestic sale or export of their finished products. The Hong Kong enterprises maintain the buyer/seller relationship with their Mainland counterparts. The taxable profits of the Hong Kong enterprises in Hong Kong are derived from their trading transactions. Since the profits derived from the production activities in the Mainland do not belong to the Hong Kong enterprises, IRD would not charge profits tax on the Hong Kong enterprises in relation to the Mainland production activities. Based on the "tax symmetry" principle, depreciation allowances would not be granted for the machinery and plant solely used in the Mainland production activities. According to the "territorial source" principle, IRD could not apportion part of the profits of the Mainland enterprises derived from the production activities and transfer such to the Hong Kong enterprises for assessment of Hong Kong profits tax. Based on the same principle, IRD could not allow the Hong Kong enterprises to enjoy the 50:50 basis of tax apportionment for their profits derived from trading activities. Moreover, if we were to provide in Hong Kong depreciation allowances for the machinery and plant used under the "import processing" arrangement, we would be perceived as encouraging transfer pricing. This would affect the taxing rights of Hong Kong and the Mainland, and Hong Kong would be regarded as a harmful tax competitor.
Individual enterprises make their own commercial decisions on the mode of business operation to be adopted for the purposes of upgrading and restructuring. IRD assesses taxes based on facts and in accordance with the laws.
Thank you. President.
Wednesday, May 2, 2012