Hong Kong – India Double Taxation Agreement Making Slow Progress

HONG KONG – For several years now, there have been few signs of progress in negotiations to establish a double taxation avoidance agreement (DTA) between the Hong Kong Special Administrative Region and India.

While Hong Kong and India signed a limited double taxation treaty in 2003 exempting shipping companies and airlines from paying income tax in both jurisdictions, a comprehensive DTA remains elusive.

India’s April 2010 notification of the Hong Kong SAR as a ‘specified territory’ under Section 90 of the Income Tax Act 1961 legally paved the way for two rounds of DTA negotiations in late 2010 and 2011. Talks ultimately concluded unsuccessfully, however, and plans for a third round of negotiations have yet to be made public.

Instances of double taxation occur when entities are taxed on the same income or capital by two different tax jurisdictions. Oftentimes, this occurs when an entity earns income in a country other than the one in which it is resident or is deemed to be resident in more than one state, and is therefore liable for taxation in both.

DTAs limit or eliminate double taxation by permitting companies to pay taxes in only one of the two signatory countries or jurisdictions in question.

A Policy Priority

As India’s next government begins to explore policy options for attracting increased FDI this May, fast-tracking the negotiation and ratification of a comprehensive DTA with Hong Kong may emerge as an attractive option.

While India attracts roughly US$7.465 billion in FDI each year from Singapore – with which it has maintained a comprehensive DTA since 1994 – India is not currently listed as a major recipient of outward direct investment from Hong Kong.

As rising labor costs drive manufacturing and other industries away from mainland China, a DTA with Hong Kong would place India in a prime position to become a key recipient of redirected FDI from Hong Kong – often regarded as the preeminent jurisdiction through which to route investment in mainland China.

Similarly, from the perspective of Hong Kong, a DTA with India would enable the jurisdiction to attract increased Indian investment and establish Hong Kong’s position as an entrepôt trade destination for firms seeking to export Indian-made goods to the mainland Chinese market.

For both jurisdictions, the influx in FDI a comprehensive DTA could attract has the potential to fundamentally change the investment landscape in Southeast Asia by enabling Hong Kong to compete with Singapore as the preeminent holding company jurisdiction in the region.

Regardless of whether the BJP or INC come to power in this month’s national elections, manifestos from both parties hint at a willingness to explore diverse policy options to stimulate economic growth and attract FDI in India.

Only time will tell, however, whether a DTA with Hong Kong becomes a policy priority.

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