HK brain drain fears after China tax move

Top News | Bloomberg and Stella Zhai 16 Jul 2020

Mainland professionals working in Hong Kong, including bankers, could face a tax rate as high as 45 percent compared with the previous 15 percent, arousing fears of a brain drain from the SAR, according to a report.

The focus on mainland taxes has intensified in recent weeks after state-owned enterprises in Hong Kong told workers who transferred from the mainland to declare their 2019 income so they could start paying taxes at home, Bloomberg reported.

SOEs are also informing employees in other locations such as Singapore.

The majority of SOE workers who have been instructed to pay taxes were transferred from the mainland, according to the report.

However, an employee at a major state-owned bank, who is familiar with the matter and asked not to be named, told The Standard that mainland workers who were hired overseas for the lender's Hong Kong subsidiary have also been instructed to make the income declaration.

While mainland authorities revised China's tax rules in January 2019, they only recently disclosed detailed instructions on how to comply - a move that caught many workers off guard.

According to China's new Individual Income Tax Law, a resident individual is defined as an individual who is domiciled in China or who is not domiciled in China but has stayed for an aggregate of 183 days or more in a tax year in China.

Each resident must pay an individual tax on income obtained both inside and outside China.

The move could see more mainland professionals accelerating plans to move back home, following the social unrest last year and amid the pandemic, while others are determined to remain in the SAR until they obtain a Hong Kong permanent identity card, sources said. Some companies may act to soften the blow by boosting salaries, particularly for high-ranking executives, but most employees will likely have to absorb the hit to their take-home pay, according to Feng Ao, president of finance consultancy Wosheng Law Quotient Academy.

"For the vast majority of employees, the chance of giving subsidies and raises depends on the company's profitability," Feng said, calling it "unlikely" during the circumstances created by the pandemic.

Investment bankers in the city typically earn about 25 to 30 percent more than those in Shanghai, according to recruiters interviewed by Bloomberg, though much of that extra pay goes towards higher living costs.

An ECA International survey ranked Hong Kong as the world's sixth-most expensive city for expatriates, compared with Beijing's ranking of 24th.

Some mainland workers may have little choice but to stick it out in Hong Kong, according to Lee Quane, regional director for Asia at ECA, an advisory firm for expats.

"There's often a reason why they're working in Hong Kong rather than in the mainland - because it's a better location for them to work in terms of the jobs that they do," Quane said.

Despite mainlanders being theoretically obliged to pay taxes on their global income for many years, it had not been enforced, said Jacky Chu, PricewaterhouseCoopers' head of China's global mobility services.

The change could be a boon for accounting firms, creating a surge of inquires for advice.

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