Issue 6 Volume 18 June 2022 DRIVING BUSINESS SUCCESS INNOVATION CITY How is Hong Kong’s innovation and technology ecosystem evolving to nurture the next unicorns? CHINA TAX Expert panellists discuss the latest tax trends in China at the Institute’s China Taxation Conference 2022 PROFILE Ricky Tsang FCPA, &GRWV[ %JKGH (KPCPEKCN 1HƂEGT of Chinachem Group SECOND OPINIONS When is the right time to quit your job? PLUS:
PRESIDENT’S MESSAGE APLUS June 2022 1 This year, Hong Kong is celebrating the 25th anniversary of the establishment of the Hong Kong Special Administrative Region, as well as the beginning of a new chapter of stability, prosperity and opportunity. To mark the occasion, the Institute has joined hands with fellow accounting bodies including the Association of Hong Kong Accounting Advisors, Hong Kong Association of Registered Public Interest Entity Auditors Limited, Hong Kong Business Accountants Association, Society of Chinese Accountants and Auditors, as well as other members of the industry, to become the title sponsor of the Greater Bay Philharmonic Orchestra’s “Celebration for the 25th Anniversary of the Establishment of the Hong Kong Special Administrative Region” concert. The concert will be held in the name of the Hong Kong accounting profession in the Xiqu Centre’s Grand Theatre in the West Kowloon Cultural District, featuring classical masterpieces as well as orchestral arrangements of Canto-pop classics. Complimentary tickets have been allocated among our committee members to thank them for their contribution to the Institute and the profession. I wish them an enjoyable evening and hope it will contribute to their work-life balance. The milestone will also mark the establishment of the sixth term of the Hong Kong government. The illustrious governing team assembled by incoming Chief Executive John Lee, with an excellent mix of industry expertise and government experience, lends great confidence to Hong Kong’s continued success and evolution as a global financial centre. We are especially buoyed by the fact that Financial Secretary Paul Chan FCPA will remain in office, while Professor Nelson Lam FCPA (practising) has been appointed as Director of Audit. Both are seasoned members of the Institute and have served on the Institute’s Council in the past as president and vice-president respectively. Their appointments are mostdeserved recognitions of their expertise and achievements. While the Financial Secretary has already proven to be an inspiring leader, I am confident Professor Lam will also excel in his pivotal role in the Audit Commission to help the government and public sector enhance their performance and accountability. They will be role models for demonstrating how CPAs are the success ingredients in their respective roles. The city and the Hong Kong government’s gain is also the Institute’s loss, as there is now a vacancy on the Council. In accordance with the Professional Accountants Ordinance, the Council has resolved to make a general invitation to all members to submit nomination of suitable candidates for consideration for appointment by the Council to fill the vacancy. Interested members may visit the Members’ Area on the Institute’s website for further details on eligibility and the nomination process. Regardless, the Institute will continue to advocate on behalf of the profession and contribute the profession’s expert opinion on relevant policy areas. For some time, the Institute has been urging the Secretary for Labour and Welfare to review and increase the relevant ceilings under the Protection of Wages on Insolvency Ordinance (PWIO) which had not been reviewed for over 20 years. We were therefore thrilled when a resolution to amend the PWIO was passed in the Legislative Council in June. The resolution increases the ceilings on outstanding entitlements owed to workers who are made redundant, due to the insolvency of their employers, and which may be paid out by PWIO. The Institute is constantly looking for ways to be more valuable to its members and beyond, and that includes our different communication channels and publications, such as A Plus. Which is why you will have learned from various channels of the Institute that we are taking the exciting first step of going fully digital starting from September. This means those who have subscribed to physical copies of A Plus will no longer receive them beginning in the September issue, but will continue to have full access to the magazine in the existing digital, PDF and flipbook formats alongside other readers who have already made the jump. In addition to being part of the Institute’s sustainability plan and commitment to achieving net zero carbon emissions, the change will be part of a broader plan to revamp and enhance the overall experience for readers of A Plus. Please stay tuned as we make more announcements. Loretta Fong CPA (practising) President Dear members, “We are especially buoyed by the fact that Financial ¡ąøŵąƄÚŵƧɷÚƊŁɷ ĦÚŊɷD ɷơĪŁŁɷŵąňÚĪŊɷĪŊɷŒƵøąɎɷ while Professor Nelson Lam FCPA (practising) has been appointed as Director of Audit. Both are seasoned members of the Institute and have served on the Institute’s Council in the past.”
CONTENTS Issue 6 Volume 18 June 2022 NEWS 01 President’s message 04 Institute news 07 Business news FEATURES 08 China Taxation Conference 2022: Navigating uncertainty A panel of experts discuss the latest tax relief measures and the crackdown on tax fraud in Mainland China 14 Leadership: Ricky Tsang FCPA The Deputy Chief Financial Officer of Chinachem Group on how his CPA skills help him ensure growth for the property developer 20 Centre of attention With its list of advantages and proximity to the Mainland, can Hong Kong maintain its status as a hub for tech start-ups amid ongoing economic challenges? 26 Second opinions When is the right time to quit your job? 28 How to Kristy Illuzzi, Principal of SME/SMP and Research at the International Federation of Accountants, on developing a sound succession plan 29 Thought leadership: Edward Au FCPA (practising) The Vice President of the Hong Kong Institute of CPAs and Southern Region Managing Partner, Deloitte China, on Hong Kong’s new regime for special purpose acquisition companies 30 Q&A with a PAIB Tim Wong CPA, Head of Treasury at West Kowloon Cultural District Authority 31 Q&A with a PAIP Gloria So CPA, Partner, Risk Advisory Services, SWHong Kong 33 Meet the speakers What to expect from an e-seminar on the latest employment trends and relevant tax implications 08 Panellists at the Institute’s China Taxation Conference 2022 discuss tax-related opportunities and challenges that have arisen as Mainland China develops its taxation system, and what companies and individuals can keep in mind in light of tightened regulation 30 Q&A with a PAIB 31 Q&A with a PAIP China Taxation Conference 2022: Navigating uncertainty
DRIVING BUSINESS SUCCESS About our name A Plus stands for Accounting Plus. It represents a profession that is rich in career options, stays relevant amid rapid changes, and adds value to business. This magazine strives to present the global mindset and varied expertise of Institute members – Accountants Plus. Editor Gerry Ho Email: gerry.ho@mandl.asia Managing Editor Jemelyn Yadao Copy Editor Jeremy Chan Associate Editor Nicky Burridge Contributor Thomas Lo Registered Office 2/FWang Kee Building, 252 Hennessy Road, Wanchai, Hong Kong Advertising enquiries Advertising Director Derek Tsang Email: derektsang@mandl.asia ISSN 1815-3380 President Loretta Fong Vice Presidents Roy Leung Edward Au Chief Executive and Registrar Margaret W. S. Chan Director of Corporate Communications Dr Wendy Lam Publication Manager Michael Wong Editorial Coordinator Maggie Tam Office Address 37/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Tel: (852) 2287-7228 Fax: (852) 2865-6603 Member and Student Services Counter 27/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Website: www.hkicpa.org.hk Email: hkicpa@hkicpa.org.hk SOURCE 34 Proposed revisions to the Code of Ethics An overview of the Institute’s response to two IESBA exposure drafts on the Code of Ethics 36 Technical news WORK-LIFE BALANCE 40 Moving as one Members of the Institute’s dragon boat team recount their first competition in two years and how the sport pushes them forward in life 46 Young member of the month Christy Lam CPA, Manager, Technical Accounting at CLP Holdings Limited 48 After hours Institute members recommend their favourite ways to unwind 48 40 Moving as one After hours A Plus is the official magazine of the Hong Kong Institute of Certified Public Accountants. The Institute retains copyright in all material published in the magazine. No part of this magazine may be reproduced without the permission of the Institute. The views expressed in the magazine are not necessarily shared by the Institute or the publisher. The Institute, the publisher and authors accept no responsibilities for loss resulting from any person acting, or refraining from acting, because of views expressed or advertisements appearing in the magazine. ©Hong Kong Institute of Certified Public Accountants June 2022. Print run: 6,940 copies The digital version is distributed to all 46,954 members, 13,924 students of the Institute and 2,358 business stakeholders every month. 14 Building a better tomorrow Ricky Tsang FCPA, Deputy Chief Financial Officer of Chinachem Group, on how he transformed the group’s finance function and continues to push for better sustainability initiatives within the company
NEWS Institute news Business news 4 June 2022 To enhance the overall experience for readers of A Plus, the Institute will be implementing changes to the publication in two phases. In the first phase, A Plus will halt the production of physical copies, shifting fully online starting with the September 2022 issue. Members will continue to have full access to the magazine through the digital, PDF and flipbook versions with timely enhancements to the user interface. The move is part of the Institute’s sustainability plan and commitment to achieving net zero carbon emissions. In the second phase, the Institute will introduce a new approach to editorial content and shift towards a quarterly publication schedule starting next year. The last monthly publication will be the October 2022 issue with the first quarterly issue coming in January 2023. Look out for further updates on the revamped A Plus. Filling a vacancy on the Institute’s Council A vacancy has arisen in the Council of the Institute. Professor Nelson Lam FCPA (practising), will take office as the Director of Audit in the Hong Kong government, effective 1 July 2022, and has tendered his resignation as Council member with effect from 24 June 2022. A general invitation has been launched to all members to submit nomination of suitable candidates for consideration for appointment by the Council to fill the vacancy. Interested parties should refer to the latest notice in the Members’Area on the Institute’s website for details on eligibility and the nomination process. Short survey on Specialist Interest Groups The Institute is conducting a two-minute survey on members’ interest in the Institute’s Specialist Interest Groups and their activities. The survey will help the Institute better understand and cater to the needs and interests of members, and to provide members the best possible support through the activities organized and the information provided. Members should complete the survey by 22 July. The Institute welcomes passage of resolution to amend Protection of Wages on Insolvency Ordinance The Institute welcomes the passage of the resolution in the Legislative Council on 16 June to amend the Protection of Wages on Insolvency Ordinance (PWIO). The resolution will increase the ceilings for wages in arrears, wages in lieu of notice, severance, untaken statutory holidays and untaken leave, under the PWIO. The Institute has long been urging the Secretary for Labour and Welfare (SLW) to review and increase the relevant ceilings under the PWIO, in particular the limits on wages in arrears and wages in lieu of notice, which had not been reviewed for over 20 years. As the Institute’s then president wrote in a letter to the SLW in April 2020, the Protection of Wages on Insolvency Fund has always been a vital source of early payments for workers who are made unemployed due to the failure and winding up of their employers, and who have not received their full entitlements. Given the increase in unemployment over the past two years, this had become an even more important issue. The adjusted maximum amounts came into effect on 17 June. Stanley Dragon Boat Championships 2022 The Institute’s dragon boat team participated in the Stanley Dragon Boat Championships 2022 on 3 June and won the first runner-up in the Mixed Bronze Cup. Congratulations to our athletes! Read about their experience and love of dragon boat racing on page 40. A Plus magazine revamp coming soon
APLUS Resolution by agreement Fong Tak Ching CPA (practising) and Zhonghui Anda CPA Limited Complaint: Failure or neglect to observe, maintain or otherwise apply Hong Kong Standard on Auditing (HKSA) 450 Evaluation of Misstatements Identified during the Audit, HKSA 260 Communication with Those Charged with Governance, and HKSA 230 Audit Documentation. Zhonghui Anda CPA Limited audited the consolidated financial statements of Fresh Express Delivery Holdings Group Co., Limited, a Hong Kong listed company, and its subsidiaries for the year ended 31 March 2017. Fong was the engagement director of the audit. The Institute received a referral from the Financial Reporting Council (FRC) about audit irregularities. The FRC noted that an immaterial overstatement of liability had not been adjusted in the financial statements, but the respondents failed to include the overstated amount in a summary of unadjusted misstatements. In addition, the respondents failed to prepare adequate audit documentation of their procedures carried out on the above misstatement and the determination of audit materiality. Regulatory action: In lieu of further proceedings, the Council concluded the following should resolve the complaint: 1. The respondents acknowledge the facts of the case and their non-compliance with professional standards; 2. The respondents be reprimanded; and 3. Fong and Zhonghui Anda CPA Limited pay an administrative penalty of HK$35,000 and HK$50,000 respectively to the Institute, and they jointly pay the costs of the Institute of HK$15,000 and of the FRC of HK$112,967. Disciplinary findings Ng Kwok Ching, Jeremy CPA (practising) Complaint: Failure or neglect to observe, maintain or otherwise apply HKSA 500 Audit Evidence and HKSA 230 Audit Documentation. Ng is the sole proprietor of Jeremy Ng & Company (formerly known as Tang & Ng), a CPA firm. He is responsible for the firm’s quality control system and the quality of its audit engagements. The Institute’s follow-up practice review visit to the firm in 2016 found that a number of deficiencies noted in the initial practice review remained uncorrected, and the audit work performed on the sole client in the relevant period fell below the standard expected. The audit deficiencies related to obtaining evidence for a number of material items in the financial statements, obtaining management’s representation letter and preparing documentation. Decisions and reasons: Ng was reprimanded. In addition, the practising certificate issued to Ng was ordered to be cancelled with no issuance of a practising certificate to him for 12 months. Ng was also ordered to pay a penalty of HK$50,000 and costs of disciplinary proceedings of HK$55,000. When making its decision, the Disciplinary Committee took into account the particulars of the breaches committed in this case, the parties’ submissions, and the respondent’s conduct throughout the proceedings. The committee noted that the breaches were serious in view of Ng’s failure to address the audit deficiencies found in the initial practice review, his lack of understanding at the level of competence expected of a professional accountant and the questionable accuracy of the audited financial statements. Ng appealed the committee’s decision. Following the Court of Appeal’s dismissal of the appeal in April 2022, the practising certificate of Ng was cancelled with effect from 18 May 2022. Jimmy Siu CPA (practising), Yip Kai Yin CPA and Elite Partners CPA Limited Complaint: Failure or neglect by Siu and Elite Partners CPA Limited to observe, maintain or otherwise apply HKSA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Hong Kong Standards on Auditing, HKSA 500 Audit Evidence, and HKSA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. Failure or neglect by Yip to observe, maintain or otherwise apply HKSA 220 Quality Control for an Audit of Financial Statements. Elite Partners CPA Limited expressed an unmodified auditor’s opinion on the consolidated financial statements of L & A International Holdings Limited, a Hong Kong listed company, and its subsidiaries for the year ended 31 March 2017. Siu was the engagement director and Yip was the engagement quality control reviewer of the audit. The Institute received a referral from the FRC concerning deficient procedures carried out by the audit team on impairment assessment of the company’s interest in an associate. There was also inadequate engagement quality control review of the significant judgements made and conclusions reached by the audit team in the impairment assessment. Decisions and reasons: The Disciplinary Committee reprimanded the respondents. In addition, the committee ordered the respondents to jointly pay a penalty of HK$500,000 and the costs of the Institute and the FRC totalling HK$258,871.65. When making its decision, the committee took into consideration the particulars in support of the complaints, the parties’ submissions, and the respondents’ admission and their circumstances. Details of the resolution by agreement and disciplinary findings are available on the Institute’s website. June 2022 5
NEWS Business The closing share price of GOGOX Holdings on 24 June, when the logistics company listed on the Hong Kong Stock Exchange (HKEX), valuing the company at HK$10.4 billion. It was the first listing to be marked by a physical ceremony in the HKEX’s listing hall after two years, with all listing ceremonies held online due to the pandemic. 40% HK$862.5 million The amount in debt that China Evergrande Group failed to pay, leading to the group facing a winding-up petition submitted by a foreign creditor. It is the first winding-up petition known to have been filed against Evergrande, Mainland China’s second-largest developer by sales, which is reeling under more than US$300 billion in liabilities. Hong Kong’s unemployment rate slid to 5.1 percent in the March to May period of the year. The figure, which is down from 5.4 percent seen in the February to April period, was announced by the Hong Kong government on 17 June and is attributed to support from the city’s Consumption Voucher Scheme and relaxed social distancing measures. June 2022 7 The value of the loan Cathay Pacific will be able to access over the next 12 months. The loan facility is an extension of the rescue package granted by the Hong Kong government in 2020 to help the embattled flagship carrier stay afloat amid the impact of the pandemic on travel. It is the airline’s second such loan extension in two years. Kelly Grier The Chair and Managing Partner of EY United States, who stepped down from her role this month. Grier’s resignation came after disagreements with EY’s Global Chief Executive Carmine Di Sibio over the influence her business should wield within the firm’s international operations, reports the Financial Times, citing people familiar with the matter. “You need the right systems to get the right data and internal controls, just to make sure that the information and data that is being used to support decision-making by senior management, and oversight by boards of directors, is as correct as can be.” – Kevin Dancey, Chief Executive Officer of the International Federation of Accountants (IFAC), told Accounting Today. IFAC released a call to action this month urging chief financial officers and finance leaders to improve the quality of sustainable information and processes by leading with an “integrated mindset.” HK$16.72 HK$7.8 billion The percentage decrease in cash Hong Kong expects in initial public offerings (IPO) the rest of the year compared to 2021, according to a forecast released by PwC this month. The firm is the first of the Big Four firms to soften its IPO forecast for the year. So far, 22 IPOs in the city have raised HK$17.1 billion this year, representing a 92 percent drop compared to a year ago at this time. The name of a new scheme that will see eligible exchange-traded funds (ETFs) included in Stock Connect. The announcement, issued by China Securities Regulatory Commission and Hong Kong’s Securities and Futures Commission this month, will allow investors in Hong Kong and Mainland China to trade eligible ETFs listed on each other’s exchanges through local securities firms or brokers, starting 4 July. ETF Connect 4 The number of additional members appointed to the International Sustainability Standards Board (ISSB). The IFRS Foundation Trustees announced the appointment of Richard Barker, Verity Chegar, Bing Leng and Ndidi Nnoli-Edozien as inaugural members of the ISSB.
China Taxation Conference 2022 TAXATION NAVIGATING UNCERTAINTY CHINA TAXATION CONFERENCE 2022: SPEAKERS: (fromleft) DANIELHUI Partner of ChinaTaxat KPMGTax Services, andamember of the TaxationFacultyChinaTax Sub-Committee (CTSC) CECILIALEE Partner, TaxServices andTransfer PricingServices at PwC, anda member of theCTSC SARAHCHANFCPA Partner, TaxandBusinessAdvisory Services, DeloitteChina, Chair of the TaxationFacultyExecutiveCommittee (TFEC), andConvenor of theCTSC BRUCELI FCPA TeachingFellowfromtheSchool of AccountingandFinance, theHong KongPolytechnicUniversity, anda member of theTFECand theCTSC WILLIAMCHANCPA Partner, Grant ThorntonTax Services, andamember of theCTSC SAMPANGCPA Partner for thePeopleAdvisory Services at EY (China) Advisory Limited, ShenzhenBranch 8 June 2022
APLUS When it comes to the latest tax trends in Mainland China, there continues to be many uncertainties and challenges brought about by COVID-19, as well as the evolving state of tax administration. In this environment, companies and individuals need to exercise greater due diligence when it comes to their tax reporting to ensure that they are compliant and remain on the right side of the law. This was one of the key takeaways at the China Taxation Conference 2022, hosted virtually by the Hong Kong Institute of CPAs in May. Speakers and panellists engaged in a lively discussion over some of the main challenges and opportunities that have emerged as a result of Mainland China’s efforts to develop its taxation system. Some of the key themes included the latest tax relief measures and the intensifying crackdown on tax fraud. Facilitating the event was moderator Sarah Chan FCPA, Partner, Tax and Business Advisory Services, Deloitte China, Chair of the Taxation Faculty Executive Committee (TFEC), and Convenor of the Taxation Faculty China Tax Sub-Committee (CTSC). She started the conversation by explaining the theme of the conference, and issues that more robust tax administration has posed for taxpayers in Mainland China. “For taxpayers, whether individuals or businesses, they are facing many more taxation costs today, and there are still many uncertainties because of the pandemic. This is why, beyond sharing the latest updates and notable changes in China tax, we have Expert panellists at the Institute’s recent China Taxation Conference 2022 discuss challenges and opportunities as the country’s tax administration continues to evolve, and how tax will play a vital role in its economic recovery. Jolene Otremba reports. Photography by Calvin Sit June 2022 9
China Taxation Conference 2022 TAXATION invited seasoned experts and academics to talk about the real world impact these changes have on companies and individuals. Despite all these challenges, what are the opportunities for us to improve the taxation system?” she asked. “What can businesses and taxpayers expect? What’s coming?” To answer this question, Bruce Li FCPA, Teaching Fellow from the Hong Kong Polytechnic University’s School of Accounting and Finance, and a member of the TFEC and the CTSC, said that practitioners need to grasp the bigger picture in Mainland China. He noted that the State Council held an emergency meeting on 25 May involving around 100,000 local government officials, with Premier Li Keqiang urging local governments to quickly implement economic stimulus policies to mitigate the economic impact of the lockdowns in cities like Shanghai. Bruce Li emphasized that the sudden announcement of the meeting signals that the Chinese government is earnestly making plans for an economic recovery while juggling the containment measures around the COVID-19 pandemic. Many of the stimulus policies were focused on expanding previous support measures such as tax reliefs, fee reductions and subsidies. “The government has noticed the downward trends in its data, and they want to send a message before it’s too late,” explained Li. “It is a matter of balancing between costs and benefits. China understands the cost of its current COVID strategy, but it will not keep pumping more money in to solve the problem. The government feels that help can be from the bottom up, too.” He explained that the Chinese government understands that the pandemic measures have led to growing economic pressures, higher operational costs and disruptions in the supply chain, and this is why it has chosen to release a host of tax relief measures aimed at easing the economic burden on taxpayers, and small and medium enterprises (SMEs). At the same time, the meeting sent a strong message, warning local officials to focus on building up the fundamentals, and not simply rely on the state government for large stimulus packages. Fellow panellist Daniel Hui, Partner of China Tax at KPMG Tax Services, and a member of the CTSC, said that the current tax relief measures are aimed mainly at SMEs in certain vulnerable industries, in the hope that they will be able to weather the current economic storm. “China is essentially using tax measures to help its people. They don’t want to see these SMEs close down,” he said. For example, the government has pledged 1.5 trillion yuan of large-scale value-added tax (VAT) rebates to be doled out this year, and it has further issued directives on how to speed up the payments and refunds for certain businesses. The details were published through the 2022 Report on the Work of the Government released in early March. Hui explained that the VAT rebates will be rolled out to companies that fall under six industries: manufacturing, scientific research and development and technology services, energy production and supply, software and information technology services, ecological protection and environmental governance, as well as transport, logistics, warehouses and postal. The panellists believe that supporting these industries makes sense, as it is in line with the Mainland’s broader goal of shifting the country towards a more servicebased economy. For the same reasons, Mainland China has also been focusing on creating specialized tax zones, Hui explained. Pointing to Hainan Island as an example, he explained that making Hainan Island a free trade port was always part of the government’s strategy to attract more foreign direct investment into the country. “The government wants to encourage foreign investment into these areas including the Greater Bay Area (GBA) as part of the strategic development plan. This has always been their long-term plan. They want to attract modern services and create international service centres, like Hong Kong, for bigger multinational corporations (MNCs), and to improve the local area,” Hui said. To that end, the Mainland has 10 June 2022
APLUS already relaxed visa requirements, and loosened restrictions on capital flows and data into these areas. Furthermore, to attract talent, it has reduced the income tax rate for qualifying individuals and companies in areas such as Qianhai, Hengqin and Hainan Island to just 15 percent, which is lower than the rest of the Mainland. This prompted Sarah Chan to ask the panellists whether they thought it was attractive for MNCs to consider going into these areas, where the bar is set lower to do business in Mainland China. “Wouldn’t it be worth putting your resources into specially-designated areas or particular industries that the government is encouraging?” she asked. William Chan CPA, Partner at Grant Thornton Tax Services, and a member of the CTSC, commented that there are fewer incentives to take advantage of those specific areas for many MNCs that are also major manufacturers. “Many of these MNCs may already qualify for a 15 percent tax rate under the High and New Technology Enterprise programme, regardless of where they are set up. So for them, they are not locked into a particular geographical location,” he said. “Especially since requirements may vary greatly for each area, making it more or less easy for MNCs to enter them.” Hui added that, for Hainan, in particular, its duty-free programme has made it an attractive destination for luxury brands, while insurance companies have targeted GBA cities such as Shenzhen, Guangzhou and Foshan to set up their services centres, as an entry point for future business opportunities, as the CrossboundaryWealth Management Connect Scheme continues to evolve. Cecilia Lee, Partner, Tax Services and Transfer Pricing Services at PwC, and a member of the CTSC, warned that while it looks like an attractive option, at the end of the day, “if you are a business and you want to go in there, you need to make sure you have sufficient economic substance,” she emphasized, explaining that tax authorities have already put policies in place to identify shell companies with minimal substance. The discussion then quickly turned to the fact that businesses are not the only entities that will benefit from new tax concessions. Individuals also stand to gain under these expanded provisions. Sam Pang CPA, Partner for the People Advisory Services at EY (China) Advisory Limited, Shenzhen Branch, pointed to tax exemptions for foreigners as an example. He noted that in order to keep Mainland China competitive in the global talent market, the Ministry of Finance and State Taxation Administration had released Circular No. 43, extending tax exemptions for foreigners’ fringe benefits to the end of 2023. Previously, as from 2022, foreigners working in the country were to lose some tax-free fringe benefits, such as housing rental and children’s education costs. While this was a welcome move, Pang noted that it also posed certain challenges for tax practitioners who wanted to do tax planning, because now foreigners would wonder if there would be further extensions after the new deadline. “What are the new expectations? How do clients plan beyond the end of the next year? We aren’t able to give definite answers to many of these questions.” Risks and challenges To further highlight some of these issues, Sarah Chan presented the panellists with a fictional scenario, where a Hong Kong company in the animation and video gaming industry decided to open several subsidiaries in Mainland China to develop intellectual property, as well as promote and sell their products in the Mainland. She asked the speakers, what were the issues, risks and challenges for the company, the tax authorities, and even for individuals who participated in promotion activities? In examining the case, the speakers agreed that this was not an unusual set up these days, and that the case highlighted many of the problems that companies are facing when it comes to filing tax returns, or being tax compliant, in the Mainland’s current tax environment, given the ongoing COVIDmeasures. June 2022 11
China Taxation Conference 2022 TAXATION For starters, Pang lamented that, unlike many other countries, Mainland China hasn’t made any concessions for COVID-19 and there are no special facilities to address any tax problems. “So, a common problem now is that businesses or personnel who are supposed to work in Hong Kong are stuck in China, or the other way round, for more than 90 days because of COVID-related travel restrictions. Whether it’s personal or business tax, there are real effects,” he said. Pang explained that, depending on whether an employee has been able to go back to Mainland China, or is in Hong Kong working in a China-based job, taxing is complicated for the authorities, too. “In such a scenario, the tax authorities would assess whether a foreigner has duties inside or outside of China by calculating their time apportionment, so as to collect taxes on a pro-rata basis, depending on what is China-sourced income versus what is Hong Kong-sourced income,” he explained. However, there are still many ways in which things can go wrong. Firstly, when it comes to calculating the time apportionment for people who travel in and out of the Mainland for work, Pang explained that if an employee doesn’t stay in the Mainland for more than 183 days, there is an assumption that they don’t need to pay taxes. However, if their income comes from an employer based in the Mainland, they may be liable to taxes. Then there’s the salary package, he continued. By breaking up the salary package, companies could structure their employees’ packages so that it isn’t taxable, he explained. But then the real question is: “How many salary packages can be broken down like this? The law only allows this to be done within reason. Well, what is within reason?” Pang said. “With so many ambiguities, mistakes can happen stemming from a misunderstanding or misinterpretation of the rules.” Vigilance is key Hui took this opportunity to talk about the importance of corporate vigilance. He advised companies and individuals to be very careful as the trend is now for the tax authorities to continue tightening their supervision of businesses and their operations, especially in special ports like Hainan, which they do not want to become tax havens or locations for shell companies. “The taxman may have given these concessions now, but industries must be very careful,” Hui said. “The tax filings are now all online and taxpayers’ information is in the system, so in this regard, China is quite advanced in data analytics. They’re looking at your company’s data and doing their analysis, so you need to know how your company is paying taxes in China, and you must be prepared when they come asking questions.” The panellists agreed that digitalization has accelerated the crackdown on tax fraud, and investigations are becoming much more prevalent today. Citing recent high-profile cases, such as the case of Chinese social media personality and e-commerce influencer Viya, who was fined a record 1.34 billion yuan (US$210million) for tax evasion in December 2021, the panellists jumped into a lively discussion on how to tackle some of these taxation challenges, especially when it comes to cross-border businesses. Referring to the hypothetical case that Sarah Chan had put forward, Lee suggested that companies like gaming companies could consider cost sharing as a way to ensure tax compliance. “If you cost share on everything, then there’s no need to explain yourself. You can even share A new era in China’s Golden Tax System This year, China is expected to roll out Phase IV of its Golden Tax System (GTS) in a bid to tighten its supervision based on big data. This is a significant development that will lead to an increase in crackdowns, as Mainland China continues on its course to digitalize its entire tax system, according to Tony Yao, Director of Tax and Business Advisory Services at Deloitte China. “Although the exact date hasn’t been set, we know that, through the digitalization and centralization of all the data, the tax authorities can better look at taxpayers through a centralized, streamlined process and do quicker analysis to spot risks,” he explained at this year’s China Taxation Conference. The move is part of the country’s goal to better safeguard its largest source of fiscal revenue to speed up economic recovery, while moving the tax bureau towards a new concept of managing tax through data. The new system, an upgraded version of the GTS Phase III, will allow the tax authorities to expand their inspection to an enterprise’s business, capital, personnel and other data, thereby making it easier to detect any evasion of taxes. According to Yao, the new phase will have an impact both on the tax authorities as well as on businesses operating in China. Mainly, it will simplify the tax return process for the taxpayer, but it will also give the tax bureau a better overall picture to monitor the entire transaction chain through digital invoices. “By digitalizing the entire process and having this overview, the response rate and the analysis rate will be much more efficient and much faster,” he explained. Yao equates the latest upgrade to a real-time health check. “In Phase III, it was like seeing a doctor for a sore throat and the doctor would only look at your throat and that was it, but in Phase IV your overall health would be monitored by the hospital online in real time,” he said. In other words, “Using tax returns, data from other government authorities such as those extracted from customs returns and information on the Internet, they can immediately assess a company’s risk in real time. It quickly shows where the risks are and then the relevant department can investigate. It’s more targeted and faster.” The key breakthrough of this new phase is that tax information of all entities can be exchanged even more quickly between different levels of tax authorities, from the national headquarters, provincial offices down to the local tax bureaus. Under such comprehensive monitoring, it will become harder for offenders to fly under the radar. 12 June 2022
APLUS the intellectual property rights, and then you just need to pay taxes on both sides,” she suggested. However, while Hui agreed that cost sharing is worth exploring, he said that another question that companies need to ask themselves is how can they overcome any issues around the base cost? “In China, the tax authorities are always looking at your invoices, so howwould you support the overseas costs and allocate out, especially in terms of the cross-border movement of funds? Howwould you explain to the foreign exchange authorities? Companies need to think about different implications altogether.” Moving on, the discussion then turned to look at businesses where there are multiple cross-border stakeholders involved. When it comes to who would be responsible for what portion of the taxes, and in which jurisdiction the tax liabilities are due, Pang admitted these issues are complicated and ambiguous at best. With so much uncertainty, Sarah Chan then posed the question, “With tax exemptions appearing to be a double-edged sword, what is your advice to businesses?” Lee shared her usual advice to clients: “From an industry point of view, it is best to think about what your story is. Prepare your defence documents and consider an advance pricing agreement (APA), then you never have to worry about it.” Indeed, Lee emphasized that APAs have become a trend in Mainland China in recent years, in part, as a way to prepare for the rolling out of Pillar One of the Base Erosion and Profit Shifting 2.0 project. “Go back to the drawing board and work out the transaction flows; know your big picture,” she urged the audience, describing investigations these days as microscopic in nature. The panellists agreed that tax planning has never been more important, and companies operating in the Mainland must have a very clear picture of how they are operating their business in the country. “Make sure that all your expenditures are in line with what the company says it is actually doing,” Hui advised. “You can’t be a shell company operating in China. You have to have substance otherwise it is very risky.” Pang agreed, saying that for anyone flouting the rules, “there are dire consequences these days. Look at these high-profile cases, the penalties have been high and the consequences long-lasting.” Considering these developments, Sarah Chan asked the panellists what they thought the future trends and developments would be. “What is going to be the biggest challenge for CPAs?” she asked. William Chan said that the most difficult thing to contend with moving forward are the uncertainties around tax planning and transaction planning. “There are so many uncertainties for all parties,” he emphasized. “If there’s an investigation, it can really go back 10 years. Are you confident that you can pull out all your reports from 10 years ago? “Furthermore, will the tax bureau double tax if an investigation is launched in Hong Kong and the Mainland, and what are the rules around that? This is a real issue for accountants,” he added. “There are so many uncertainties and navigating your way around this is going to be the biggest challenge.” The panellists also agreed that digitalization of the entire tax system will continue to be a trend, as will further developments in transfer pricing and APAs. But for now, 2022 is set to be a year when the country will see a greater number of crackdowns on tax abuses while it tries to navigate its way out of the pandemic. Developed in 1994, China’s Golden Tax System is a country-wide value-added tax (VAT) administration and monitoring system that relies on an online network of tax authorities to closely control VAT special invoices called fapiao, monitor corporate VAT tax status and ensure taxpayers’ compliance. The digitalization and subsequent upgrades of the system have been seen as a significant step towards tax stabilization and the simplification of tax processes in the country. June 2022 13
PROFILE Ricky Tsang FCPA BUILDING A BETTER TOMORROW Sustainability has to be at the foundation of every business and building today, says Ricky Tsang FCPA. The Deputy Chief Financial Officer of Chinachem Group tells Jeremy Chan how he guided the group through change, enhanced its resilience by maintaining cash flow, and how his combined experience in governance, risk management, corporate finance, and real estate provides him with the foresight and skills to continuously add value Ricky Tsang FCPA asks himself the same question everyday: “What can I enhance within the company to benefit the people, planet, all while ensuring group’s prosperity?” It is a difficult question to answer, Tsang notes, but it serves as the backbone for the crucial decisions he makes as Deputy Chief Financial Officer of ChinachemGroup. The group, a leading property developer in Hong Kong, is unique, Tsang says, as it is neither publicly listed nor family-owned. This means it has the flexibility to place its people and best sustainability practices on the same pedestal as profits. “At Chinachem, we follow the Three Ps – people, prosperity and planet. We call it a ‘triple bottom line,’” he says, adding that this is made possible through the group’s heritage and real estate assets. ChinachemGroup was founded in the 1960s as an industrial building developer for the city’s thriving manufacturing industry at the time. In the 1970s, the group invested in farmland and traded it for sites in areas such as Sha Tin, Ma On Shan, Fan Ling and Sheung Shui, where it developed largescale community housing to cope with the rising population. The group is now focused on developing commercial and residential premises, and has completed around 200 residential developments, eight hotels, and many shopping centres around the city. “Our property portfolio has always helped to produce a strong, recurring cash flow. It has supported management in balancing the ‘people and planet’ aspect, rather than just focusing on Photography by Calvin Sit 14 June 2022
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PROFILE Ricky Tsang FCPA commercial returns,” adds Tsang. “I find it very exciting to be part of the teammanaging the sustainable transformation of our business with this vision.” Opportunity amid challenges The past two years, Tsang says, have been a challenging time for Hong Kong’s property leasing market. He points out that COVID19-related travel restrictions and social distancing measures have particularly impacted on the group’s hotel revenue and retail footfall. “Our hotels, which saw an abrupt drop in occupancy and cash flow, were hit hardest,” Tsang says. However, he notes that initiatives such as staycations, long-term stay packages, and then quarantine accommodation for travellers helped the group to sustain cash flow, avoid furloughing staff, or make employees redundant. “This helped to uphold the ‘people’ aspect of our Three Ps,” he adds. “We offered rental concessions to retail tenants based on their circumstances, as many retailers saw a prolonged period of business downturn, with operating restrictions or compulsory closures applied to selective trades.” There is also reduced demand for high-end residential property resulting from border closures. “The ongoing border controls and quarantine requirements have affected Hong Kong’s competitiveness and ability to keep expats in international companies, of which many have plans to relocate their talent, especially those with regional duties,” Tsang says. “Border closures have also reduced the number of buyers coming in from the Mainland, and the increasing number of people relocating from Hong Kong to other cities has increased the supply of property in the second hand market. This has also led to buyers negotiating a lower price.” On the contrary, first hand luxury residential sale prices are holding up, with interest in the group’s luxury property market stemming from local buyers and Mainland residents. “The location and quality of our properties attract buyers, especially after renovation,” he says. Tsang believes this momentumwill remain steady in light of eased restrictions. “As COVID-19 measures continue to relax in Hong Kong, we see more people coming out to view properties.” There is one particular project that Tsang looks forward to growing now that dining restrictions have eased and with more people out and about – Central Market. Managed by ChinachemGroup and restored by the Urban Renewal Authority (URA), the HK$500 million project sawHong Kong’s 82-year-old Central Market building revitalized after being closed for 18 years. It opened to the public in August 2021, housing restaurants, cafes, bars, shops and small businesses. Tsang is proud to see the building restored and brimming with life, all while maintaining a rustic 1940s charm. “We’ve always promoted Central Market as a kind of ‘playground’ for all,” he says. “We are, on one hand, preserving the heritage of the building, and on the other hand, turning it into a hot spot for entertainment, food and beverage, retail, and co-working.” Tsang, who played a role in monitoring the group’s investment towards the revamp, hopes Central Market will be a hotbed for small businesses to grow. “We provide a ‘plug-to-operate’ opportunity to help local start-ups and small- and medium-sized enterprises operate with a minimum amount of capital expenditure and operating expenses,” says Tsang. The group, which has been approved by the URA to be the main operator of the Central Market for a period of 10 years, is looking forward to the second phase of its opening plan, which will begin in the second half of the year. “We have diversified marketing programmes to attract different groups of visitors and a good mix of tenants,” he says. “We look forward to incorporating a virtual reality zone, a STEM or science, technology, engineering and mathematics shop, as well as unique retail, and food and beverage offerings.” Sustainability first ChinachemGroup, Tsang says, places sustainability at the forefront of its operations and developments. In January, science-based targets set by the group were officially approved by the Science Based Targets initiative (SBTi). SBTi is a collaboration between the CDP (formerly the Carbon Disclosure Project), the United Nations Global Compact, World Resources Institute and the WorldWide Fund for Nature, and provides companies with a clearly defined pathway to future-proof growth by specifying howmuch and how quickly they need to reduce their greenhouse gas emissions. “We took action in 2021 to set our science-based targets and adopt recommendations by the Task Force on Climate-Related Financial Disclosures. We also set long-term targets in according to our science-based targets to reduce our greenhouse gas emissions,” says Tsang. “This makes us the second real estate developer in Hong Kong to have completed a science-based targets validation with a 1.5 degree “This makes us the second real estate developer in Hong Kong to have completed a science-based targets validation with a 1.5 degree celsius target aligned with the Paris Agreement goals.” Chinachem Group was founded in the 1960s as an industrial building developer for the city’s thriving manufacturing industry. The group is now focused on developing commercial and residential premises, and has completed around 200 residential developments, eight hotels, and many shopping centres around the city. 16 June 2022
APLUS celsius target aligned with the Paris Agreement goals.” To ensure best sustainability practices, the group is using property technology, or PropTech, which refers to advanced technologies and software solutions that are used to solve the needs and challenges of real estate companies. PropTech allows developers and companies to integrate sustainable solutions to the development of properties and its facilities to reduce electricity and water consumption, waste, and in doing so, their overall carbon footprint. For example, by teaming up with a PropTech start-up in 2020, Tsang notes that the group is among the first developers in the world to replace diesel with clean energy at construction sites. Diesel generators are generally used to provide temporary power at sites. “We’ve introduced a portable battery storage system to a construction site at one of our residential property projects. By replacing traditional diesel generators, we can lower carbon emissions by 85 percent,” he says. In 2019, the group signed an agreement to partner with energy company CLP Power Hong Kong Limited in rolling out smart technologies at their flagship office tower in Tsuen Wan. “We collaborated with CLP Power significantly in search of solutions for our flagship building to conserve energy, and identify targets that would save a total of 14 gigawatts of electricity for the next five years,” Tsang explains. One gigawatt of power is equivalent to a billion watts of energy, and is enough to power over 100 million lightemitting diode lightbulbs. “This requires deploying technology such as metering, energy efficient heat pumps, variable speed drives and controls, electric kitchens, smart lighting hardware and solar films to manage the energy consumption at Nina Tower.” The group tests new technologies in their office building and has recently implemented systems to enhance cleanliness such as touch-free lift buttons, selfdisinfecting door handles and robotic solutions to help keep the premises clean around the clock. “Nina Tower and our existing portfolio provide excellent pilot opportunities for these new technologies,” he adds. The group plans to implement the same solutions in its future developments. Doing so, Tsang says, will decrease carbon emissions across their projects and also set a good example for other developers to follow. “Buildingrelated activities account for some 90 percent of Hong Kong’s total electricity consumption – and generating this kind of electricity accounts for more than 60 percent of the city’s greenhouse gas emissions,” he says. “So from that basis, I consider improving the sustainability of the real estate industry to be critical. We recognize that the way we live consumes far too much of the planet’s resources, which are limited and scarce. It’s important that discipline starts from this generation forward.” Green finance within the property development sector has also risen in importance in recent years Tsang adds. “Measures on green objectives, such as higher energy efficiency and less carbon emissions, can now be written in as part of the financing contract,” he says. Chinachem Group signed two bilateral sustainability-linked loans facilities, one with HSBC in December 2021, and one with Hang Seng Bank this month, worth HK$1 billion each. It also has secured a green loan worth HK$12.95 billion – the largest of its kind in Hong Kong – in partnership with Hysan Development Company Limited. “The pursuit of green finance reflects our group’s commitment to creating a green future, and to help fostering sustainable development in Hong Kong’s real estate sector.” Transforming finance As Deputy CFO, Tsang leads the transformation of the group’s As Deputy Chief Financial Officer of Chinachem Group, Ricky Tsang FCPA oversees the financial stability of the Hong Kong-based property developer. He leads the transformation of the group’s finance function and pushes for best sustainability practices. June 2022 17
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