China’s “One Belt One Road” Provides Catalyst for Hong

Kong Taxation Reform

According to the China central government’s 13th five-year plan, it has showed its full
support for Hong Kong to participate in the nation's "One Belt One Road"
development strategy, in which Hong Kong is going to play a bigger role in China's
opening up to the rest of the world.

What is “One Belt One Road”?

The Silk Road Economic Belt and the 21st century Maritime Silk Road, also known as
“The Belt and Road”. One Belt One Road (OBOR) or the Belt and Road Initiative is a
development strategy and framework, proposed by China that focuses on connectivity
and cooperation among countries primarily in Eurasia, which consists of two main
components, the land-based "Silk Road Economic Belt" (SREB) and oceangoing
"Maritime Silk Road" (MSR). The strategy underlines China's push to take a bigger role
in global affairs, and its need to export China's production capacity in areas of
overproduction such as steel manufacturing.

OBOR was unveiled by Chinese leader Xi Jinping in September and October 2013 in
announcements revealing the SREB and MSR, respectively. The coverage area of the
initiative is primarily Asia and Europe. However, Oceania is also included as well as East
Africa. The Asian Infrastructure Investment Bank (AIIB) and Silk Road Fund are the two
major financial institutions involved in OBOR.
What are the countries involved in “One Belt One Road”?
The 65 countries involved in OBOR are listed below.
East Asia: Mongolia, Singapore, Malaysia, Indonesia, Myanmar, Thailand, Laos,
Cambodia,Vietnam, Brunei, Philippines
West Asia: Iran, Iraq, Turkey, Syria, Jordan, Lebanon, Israel, Palestine, Saudi Arabia,
Yemen, Oman, UAE, Qatar, Kuwait, Bahrain, Greece, Cyprus, Egypt
South Asia: India, Pakistan, Bangladesh, Afghanistan, Sri Lanka, Maldives, Nepal, Bhutan
Middle Asia: Kazakhstan, Uzbekistan, Turkmenistan, Tajikistan, Kyrgyzstan
CIS: Russia, Ukraine, Belarus, Georgia, Azerbaijan, Armenia, Moldova
Mid-East Europe: Poland, Lithuania, Estonia, Latvia, Czech Republic, Slovakia, Hungary,
Slovenia, Croatia, Bosnia & Herzegovina, Montenegro, Serbia, Albania, Romania,
Bulgaria, Macedonia
Hong Kong’s opportunities in “One Belt One Road”
Hong Kong’s advantages
OBOR is a push to drive cooperation among Eurasian countries along the ancient Silk
Road trading route. It would give full play to Hong Kong's unique advantages and
enhance its role and function in the China's economic development as well as opening
up to the outside world. China central government thinks that Hong Kong had an edge
in developing talent and financing, and Hong Kong should make use of these advantages
to and coordinate with mainland corporates so as to better develop overseas markets.
In the 13th five year plan, Hong Kong is asked by the China central government to speed
up cooperation with free-trade pilot zones in Guangdong - Qianhai in Shenzhen, Hengqin
in Zhuhai, and Nansha in Guangzhou, and pursue deeper cooperation and exchanges
with the mainland.
The role Hong Kong may play

In July 2015, Hong Kong government has made a proposal to the AIIB could establish an
office in Hong Kong as disputes handling center (i.e. arbitration center). The AIIB has also
showed interest in using Hong Kong as a debt-issuing platform. The AIIB official noted
that Hong Kong has many advantages in debt issuing. First of all, Hong Kong is a place
with very easy access to global investors. Secondly, Hong Kong has experience in offering
Sukuk (i.e. Islamic Bond). Thirdly and most importantly, Hong Kong has a very mature
financial market with lower costs for debt issuing. In order to help Hong Kong's
companies promote their businesses, Mr. Tsang Chun Wah, the Financial Secretary of
Hong Kong, led a delegation to visit countries along the OBOR. The journey has been
started from Eastern European countries like Hungary and Poland. They are now
planning to visit to those countries in Central Asia and also the countries along the MSR.

Hong Kong’s tax reform in “One Belt One Road”

In August 2015, Hong Kong government said that Hong Kong shall amend its Inland
Revenue Ordinance for those provisions relevant to OBOR next year, in order to attract
more China and overseas enterprises to set up their corporate treasury center (CTC) and
captive insurance company in Hong Kong. Hong Kong government thinks that the local
insurance cost is relatively low, which can diversify the enterprises’ risk during their
development phase, so it is believed that a lot of enterprises around the world shall be
attracted to Hong Kong for such purpose. Recently, Chinese enterprises like CNOOC,
CGN and CNPC have already incorporated their captive insurance company in Hong
Kong, so as to manage their overseas operation. Such trend shall be continued.

To attract China and overseas enterprises to set up their CTC in Hong Kong, the Hong
Kong government has certain tax incentives plan accordingly, which include full tax
deductions on interest expenses as well as 50% exemption of profits tax payable related
to CTC operation. Singapore did implement similar tax incentive regime to cater for
OBOR in 2014. The competition is very fierce between jurisdictions facing such golden
opportunities given by OBOR.
In addition, Hong Kong, with 32 comprehensive double tax agreements (CDTA) signed
and effective with its trading partners, is eager to extend its CDTA network with those
countries along the OBOR, including India, Russia, Romania and Germany, etc.

Conclusion

Hong Kong has plenty of talents in finance, tax, law and language, among other
professional services, so it can play a critical role in those negotiations so as to protect
national interest and the shared interests of those countries involved.

Given the tax reform by Hong Kong to address for the needs arising from OBOR, it is
believed that Hong Kong can be an excellent platform for OBOR economies to raise
funds for infrastructure investment. Hong Kong can help in project financing, bridge
financing, project management, consulting services and debt issuance. At the same
time, Hong Kong should also fight for the opportunities for worldwide financial
cooperation presented by the AIIB, the BRICS New Development Bank and the Silk Road
Foundation to maintain its position as an international financial center.

AUTHOR: Catherine Le Bourgeois