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Hong Kong and India Conclude Double Taxation Avoidance Agreement

Proposals to curtail double taxation problem come to fruition, although implementation awaits governmental ratification.

Photo: Made in India, but no longer, necessarily, additionally taxed in Hong Kong. (Shutterstock.com)
Made in India, but no longer, necessarily, additionally taxed in Hong Kong.
Photo: Made in India, but no longer, necessarily, additionally taxed in Hong Kong. (Shutterstock.com)
Made in India, but no longer, necessarily, additionally taxed in Hong Kong.

The long-gestating tax agreement between India and Hong Kong was finally signed by both parties on 19 March. This brings to an end some eight years of on-and-off negotiations and represents a deal some suspected might never come to pass.

Under the terms of this new framework – a Comprehensive Agreement for the Avoidance of Double Taxation (CDTA) – the tax arrangements between the two trading partners are set to become more transparent and less burdensome. This is expected to boost the two-way flow of investment and technology, while also simplifying employment arrangements for Hong Kong citizens in India and vice-versa.

In line with the agreed terms of the deal, any tax paid in India by a Hong Kong business can be offset against any tax owing in Hong Kong on the same profits, with a reciprocal arrangement applying to tax paid in Hong Kong by Indian businesses.

The agreement also contains three specific provisions designed to benefit businesses in general, airline operators and exporters. In the first instance, India's withholding tax rate for Hong Kong residents on interest (currently set at a standard level of 20%) will be capped at 10%, provided there are no related tax-evasion issues.

In the case of Hong Kong-based airlines operating flights to India, they will be taxed at Hong Kong's corporate tax rate. They will not, however, be further taxed in India.

With regard to any profits made by Hong Kong residents as a result of international shipments to India and liable to be taxed there, that tax will now be reduced by 50%.

The agreement also facilitates a more comprehensive exchange of information between the signatories. This is seen as allowing the two to meet their international obligations with regard to enhanced tax transparency and the prevention of tax evasion.

The initial round of talks relating to the deal dates back to 2010, when the two territories first began to address the legal and logistical challenges to any such arrangement. Although apparently faltering in 2011, the two sides eventually came to a formal agreement in November last year, paving the way for its recent conclusion.

The signing, however, does not mark the actual implementation of the new arrangement. The agreement will now have to be ratified by the Indian Parliament and Hong Kong's Legislative Council.

The conclusion of the deal is expected to lead to higher levels of trade between the two territories. In 2017, India was Hong Kong's seventh-largest trading partner, with bilateral trade standing at HK$266 billion (US$34 billion).

Hong Kong now has CDTA agreements in place with 13 of its 20 largest trading partners, accounting for about 73% of its overall level of trade. At present, CDTA negotiations are ongoing with a number of its other key trading partners, including Germany, Turkey and Nigeria.

Mitra Dave, Mumbai Consultant

Content provided by Picture: HKTDC Research
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