Hong Kong still an easy place to do business but new laws loom

Hong Kong is the fourth ‘least complex’ jurisdiction in Asia to do business, research conducted by administrative services provider TMF Group showed.

The city scored highly on account of its robust legal system, ease of capital flows and strategic location, providing access to China.

However, companies operating in the special administrative region must be prepared for headwinds, including a heavier burden of legal requirements and rising complexity in tax regulations, TMF said on Tuesday in its ‘Global Business Complexity Index 2019’ report.

EXTRADITION CONCERNS

The business community is also anxious about the possibility that Hong Kong will amend its extradition laws to allow for the transfer of suspects to countries including China. Several professional bodies, including the Hong Kong General Chamber of Commerce, the Hong Kong Bar Association have expressed serious reservations about the proposed law.

If it comes into effect, the legislation could have devastating consequences for Hong Kong and its status as a center for business in Asia.

“Compliance requirements are making it more intricate to do business than before in Hong Kong, similar to other comparable jurisdictions in the region,” said Margaret Fung, managing director for Hong Kong at TMF.

“The relative maturity of the market, the foresight of regulatory policy makers and a substantial ecosystem of service providers underpin our [Hong Kong’s] position as one of the region’s and world’s most straightforward places to do business in accounting, tax and regulatory terms.”

Hong Kong placed 56th on the index, which ranked jurisdictions in descending order of complexity, with the most complex areas ranking higher than those where it was relatively easier to open and run a company.

Recent developments, such as the ‘Closer Economic Partnership Arrangement’ (CEPA, signed in December 2018), which facilitates trade between China and Hong Kong and the push for greater integration among prominent cities in south China as envisaged in the ‘Greater Bay Area’ initiative, bolstered the city’s image among investors.

Hong Kong, which has historically served as a launchpad for international companies looking to enter China, also benefitted from the rapid expansion of Chinese businesses into overseas markets, according to the report.

“China’s ongoing growth and modernisation makes Hong Kong a natural gateway for Mainland markets. This used to be very much one-way ‘inbound’ traffic but today we play an increasingly important role in helping Chinese companies expand overseas,” Fung said.

REGULATORY SPEEDBUMPS AHEAD

TMF measured countries’ performance based on three criteria -- rules, regulations and penalties; tax and accounting and conditions for hiring, firing and paying employees.

In the rules, regulations and penalties category, the speed with which a limited liability company could be opened (less than 24 hours) in Hong Kong, ease with which a business could be liquidated, strong asset protection, free flow of funds and the absence of withholding tax, which encouraged repatriation of funds, counted among Hong Kong’s strengths.

On the other hand, lengthier timelines for opening bank accounts as a result more comprehensive tax compliance rules, increasing measures to check money laundering and terrorist financing, the need to maintain and regularly update a Significant Controllers Register to reflect beneficial ownership, and stricter competition laws were labelled as ‘areas of rising complexity’ in Hong Kong.

Hong Kong’s straightforward tax system, with no capital gains tax and low profits tax, the option to apply for deferring tax filing beyond the deadline and the city’s adherence to the International Financial Reporting Standards (IFRS) as opposed to Generally Accepted Accounting Principles, which govern most of Asia, work in the territory’s favour.

But firms should remain mindful of tightening legislation to curb the practice of base erosion and profit shifting and more stringent rules on transfer pricing, warned TMF.

Hong Kong enacted legislations related to base erosion and profit shifting (BEPS) in mid-2018.

On the subject of staffing, while Hong Kong’s reputation as a safe haven for business and low income tax attract quality talent, an uncertain outlook on whether companies can secure work permits for overseas personnel and difficulty in finding people with highly specialised skills pressured the HR function.

Hong Kong’s benign tax regime certainly made it appealing as a location to establish a regional treasury center (RTC) but the general dearth of specialised treasury talent in the city dampened its prospects, a treasury recruiter told the Corporate Treasurer in April.

BIG ECONOMIES, HIGH COMPLEXITY

Thailand, Mauritius and Japan ranked 73, 62 and 59, respectively, beating Hong Kong in TMF’s easiest places to do business chart. Meanwhile, Taiwan at 46, and Singapore at 42, tailed the territory.

Tiny tax haven Cayman Islands was the least complex jurisdiction for business. At the other end of the spectrum, Greece, Indonesia and Brazil, in that order, were the three most complex business destinations.

The business environment in major Asian economies China and India posed a challenge, TMF found. At no. 9, China made it into the list of top 10 most complex jurisdictions for companies. India appeared in the list at no. 28.

“Unfortunately, some of the world’s most commercially attractive countries are the most complex from a ‘rules’ perspective,” noted TMF in its report. “The biggest challenge [for businesses] is likely to be rapid legislative change, affecting most jurisdictions. Overall, however, the global outlook is positive.”