24th May 2019
India and Hong Kong, two highly attractive destinations for international contractors have recently collaborated in the fight against international tax evasion by signing a treaty aimed at tackling non-payment. The India Hong Kong tax agreement is just another move on the part of both nations to claw back lost revenue. As two destinations which offer a lot to contractors – with Hong Kong keen to secure the skills of professionals across a range of specialisms such as sales, information technology, engineering, marketing and finance, and 56% of employers in India reporting having difficulty filling jobs – this is a development that anyone looking to work in these destinations will need to be aware of. So, what’s the latest?
India Hong Kong tax agreement – the latest
The treaty, which came into law in April 2019, is full of measures to limit tax avoidance. Hong Kong has long been viewed as a tax haven due to low tax rates and a territorial tax system that typically exempts residents from paying tax on foreign income. However, due to pressure from China, Hong Kong has been taking actions to shed this label, with the India Hong Kong tax agreement just another step towards complying with international standards, and recent guidelines put out by the OECD.
India has also put time and effort into cracking down on corruption, tightening the rules governing dual-residence which have often been used to avoid tax. The treaty will contain a Principal Purpose Test in order to target those taking advantage of dual residency, and a number of clarifications to the rules concerning passive income streams, designed to clarify the law for citizens who have business interests in each of the countries.
As we have written about before, the India Hong Kong tax agreement is just another part of both countries’ recent efforts to crack down on tax evasion. In fact, India has recently introduced a large-scale machine learning program called ‘Project Insight’, which will have the ability to thoroughly check millions of social networking profiles, scour through photos, events, and relationship details in order to spot tax evasion. The system is highly sophisticated and can target citizens in a number of ways, filtering its whole database based on income, profit, capital and gains. And, since it’s a machine learning system, it will slowly become more efficient over time as it is fed more and more data.
Hong Kong has been subject to strict legislation in China aimed at targeting evasion. The most recent example of this is the rules stating that foreigners who live and work in mainland China for prolonged periods will be required to pay tax on their worldwide income. The new legislation defines a ‘resident taxpayer’ as anyone who is either domiciled in mainland China, or non-domiciled but spends 183 days or more there over the course of a year. Previously, foreigners had to spend more than 12 months in the country before being classed as a ‘resident’. The difference between a resident and non-resident taxpayer is that the former is liable to pay tax on their global income, not just the money they make in China. Under the new rule, exemptions will no longer apply to Hong Kong residents with a permanent home or family on the mainland, unmarried Hongkongers working on the mainland, Hong Kong retirees living on the mainland, and mainlanders who work, but do not live, in Hong Kong.
Contractors need to be aware
Ultimately, with more countries collaborating over tax evasion, be it through signing treaties, or sharing information under the Common Reporting Standard, authorities now have far greater power to crack down on non-compliance. However, this had led to an environment where remaining compliant has become extremely difficult for overseas contractors. The ever-changing nature of international tax systems has made it a real possibility that workers could unintentionally find themselves breaching the law – and face huge penalties. In order to avoid this, it is advisable to employ the services of an expert contractor management service that knows how to operate in the uncertain landscape of global tax and compliance, allowing you to focus on your own expertise.
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