Issue 9 Volume 18 September 2022 DRIVING BUSINESS SUCCESS THE TALENT CHALLENGE What can companies do to attract and retain talent in today’s post-pandemic normal? ANNUAL TAXATION CONFERENCE Tax experts discuss Hong Kong’s foreign- sourced income exemption regime PROFILE Ricky Chu, Chairperson of the Equal Opportunities Commission SECOND OPINIONS What can organizations do to improve their diversity and inclusion strategies? PLUS:
Platinum sponsors: Gold sponsor: DEPLOY SUSTAIN Governance ETHICS AUDIT TRANSFORM Digitalization Finance ANALYTICS REPORTS PAIB CONFERENCE 2022 CPA Here and Now: Sustain, Transform & Deploy For enrolment Date: Saturday, 12 November 2022 I Time: 9:00 a.m. - 1:00 p.m. Venue: The Grand Ballroom, Kowloon Shangri-La, Hong Kong CONFERENCE FACE-TO-FACE
PRESIDENT’S MESSAGE APLUS September 2022 1 The number of COVID-19 cases has seen a steady decline over the past month, permitting the government to promptly adjust anti-epidemic policies. The newly enforced “0+3” arrangement for inbound visitors has been sorely welcomed by the community and shows great promise of what is to come. Without compromising defences against the pandemic and the health of our fellow citizens, I look forward to further relaxations that will allow for a larger sense of normality and revitalization. As an international city, it is vital that we provide every opportunity for activities to resume and re-establish business connections between Hong Kong and the wider community. To commemorate the 73rd National Day of the People’s Republic of China this year, the Institute, together with the Association of Hong Kong Accounting Advisors, Hong Kong Association of Registered Public Interest Entity Auditors Limited, Hong Kong Business Accountants Association, and The Society of Chinese Accountants and Auditors, co-hosted a celebration event on 23 September. The event is an important annual gathering for the accounting profession in Hong Kong. We were honoured to have Paul Chan FCPA, Financial Secretary and Institute Past President, alongside Li Xuhong, Deputy Director-General, Department of Administration and Finance of Liaison Office of the Central People’s Government in the Hong Kong SAR, and Wang Qi, Director-General of the Department of International Organizations and Conferences of the Office of the Commissioner of the Ministry of Foreign Affairs of the People’s Republic of China in the Hong Kong SAR, attending as guests of honour. While the celebration was held in the format of a ceremony, without food and beverage provided due to the pandemic, it provided an opportunity for the profession in Hong Kong to come together to foster a much closer alliance, and to promote unity and create solidarity. The month of September also marked two important events that exemplify the Institute’s commitment to nurturing the next generation of talents for the profession. Earlier in the month, we held the Institute’s Young Members Virtual Conference 2022, titled “Decrypting the future of the profession – Finding success in a sustainability-driven future and the new digital economy.” As the name suggests, the event included insights on trending industry topics such as sustainability, and environmental, social and governance, the metaverse, non-fungible tokens and more. The webinar also included discussions on essential issues for young members, such as the types of skill sets young members should possess to become future-ready CPAs, tips on career planning, as well as how to excel at interviews. On 24 September, the Institute also held the 22nd presentation ceremony for the top students from the December 2021 and June 2022 sessions of the Qualification Programme (QP) as well as scholarship recipients. We were honoured to have Joseph H. L. Chan, Under Secretary for Financial Services and the Treasury, as guest of honour to present awards to the outstanding students for the fifth consecutive year. The ceremony was especially significant as the December 2021 session marked the completion of the roll out for the new QP, and signifies the Institute’s important role of ensuring our next generation of accountants are equipped with the relevant skills for a changing business landscape. I am excited to see our young awardees and scholarship recipients build on their success and continue to excel as they progress in their careers. As we edge towards greater normalcy, I look forward to meeting our colleagues, young and old, on a more frequent basis, and hopefully, soon we will be able to hold major events over shared meals and without face masks. Loretta Fong CPA (practising) President Dear members, “Without compromising defences against the pandemic and the health of our fellow citizens, I look forward to further relaxations that will allow for a larger sense of normality and revitalization.”
CONTENTS Issue 9 Volume 18 September 2022 NEWS 01 President’s message 04 Institute news 07 Business news FEATURES 08 A new era for Hong Kong tax What will Hong Kong’s foreign- sourced income exemption regime mean for businesses? 14 Leadership: Ricky Chu The Chairperson of the Equal Opportunities Commission on fighting for equality in the city 22 Winning the talent war The pandemic has changed the way we work and what employees expect. What can companies do to attract and retain staff? 28 Second opinions What can organizations do to improve their diversity and inclusion strategies? 30 How to Tracy Ho, Founder and Director of Frame & Fame Personal Branding, on what to keep in mind for your next virtual meeting 31 Thought leadership: Ken Siong CPA The Programme and Senior Director, International Ethics Standards Board for Accountants, on the role ethics play in sustainability assurance 32 Q&A with a PAIB Archie Fong CPA, Head of Healthcare and Corporate Finance at Ping An of China Capital (Hong Kong) 33 Q&A with a PAIP Rex Leung FCPA (practising), Partner at Linkers CPA Limited 35 Meet the speaker What to expect from webinars on corporate failures in Hong Kong and Mainland China, and investing in Asian bond markets 08 Panellists at this year’s Annual Taxation Conference discuss the implications of Hong Kong’s foreign-sourced income exemption regime and how tax can stay ahead of cryptocurrency 32 Q&A with a PAIB 33 Q&A with a PAIP A new era for Hong Kong tax
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 ,i}ÃÌiÀi` "vwVi 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 "vwVi č``ÀiÃÃ 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 36 Practice implications of academic research in transfer pricing A look at recent academic research in transfer pricing and their potential impact on policy and practice 38 Technical news WORK-LIFE BALANCE 40 Diverse opportunities Ethnic minority CPAs share their inspiring career journeys 46 Young member of the month Lorraine Law CPA, Wealth Management Manager at AIA International Limited 48 After hours Institute members recommend their favourite ways to unwind 48 40 Diverse opportunities 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 September 2022. The digital version is distributed to all 47,254 members, 14,256 students of the Institute and 2,358 business stakeholders every month. 14 Cultivating harmony Ricky Chu, Chairperson of the Equal Opportunities Commission, on what accountants can do to drive diversity and inclusion in organizations
The Hong Kong Institute of CPAs conducted a Training Needs Analysis (TNA) through a survey and focus group discussions to better understand members’ training needs. The summary of the TNA results are now available on the Institute’s website. One of the key findings of the analysis is that the most preferred learning method is through e-format offerings including webinars. The summary also includes details on how the Institute is enhancing its continuing professional development (CPD) offerings to meet members’ training and development needs. Importance of CPD declaration Members are required to declare CPD compliance annually for membership renewal. As a reminder, CPD records in MyCPA on the Institute’s website do not equate to a declaration of CPD compliance, and members must still submit the CPD declaration with their Annual Return for Renewal to avoid non-renewal of membership. More details and other frequently asked questions on CPD requirements are available on the Institute’s website. IT Virtual Conference 2022 The Institute’s IT Virtual Conference 2022 will take place as a live webinar on 22 October. With the theme “From Masters of Digits to Masters of Digital Transformation,” the conference will bring together speakers to share their insights on future trends as well as key technologies that can make digital initiatives successful in organizations. The enrolment deadline is 20 October. Annual Auditing Update 2022 The Annual Auditing Update Conference 2022 themed “Strengthening Trust and Audit Quality” will be held on 29 October. The speakers will share the updates on projects of International Auditing and Assurance Standards Board, International Ethics Standards Board for Accountants, the Code of Ethics etc. Enrol by 27 October. Council meeting minutes The abridged minutes from the August Council meeting are now available in the “Members’ area” of the Institute’s website. NEWS Institute news Business news 4 September 2022 Members’ training needs study: Results out now Disciplinary finding Wong Yip Ming CPA (practising) Complaint: Failure or neglect to observe, maintain or otherwise apply Hong Kong Standard on Auditing (HKSA) 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements; HKSA 250 (Revised) Consideration of Laws and Regulations in an Audit of Financial Statements; HKSA 315 Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement; HKSA 500 Audit Evidence; HKSA 505 External Confirmations; Hong Kong Standard on Assurance Engagements 3000 (Revised) Assurance Engagements Other than Audits or Reviews of Historical Financial Information; Hong Kong Standard on Quality Control 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements; Practice Note (PN) 810.1 (Revised) Licensed Insurance Broker Companies – Compliance with the Insurance (Financial and Other Requirements for Licensed Insurance Broker Companies) Rules; PN 820 (Revised) The Audit of Licensed Corporations and Associated Entities of Intermediaries; and the fundamental principle of professional competence and due care in section R113.1 under Chapter A of the Code of Ethics for Professional Accountants, and being guilty of professional misconduct. Wong is practising in his own name with no staff. His practice was selected for its first practice review in November 2019. The reviewer identified various significant deficiencies in the practice’s quality control system and its completed audit and compliance reporting engagements. Wong was responsible for the quality control system and the quality of his audit and compliance reporting engagements. Decisions and reasons: The Disciplinary Committee reprimanded Wong and ordered the cancellation of his practising certificate, effective 6 September 2022, with no issuance of a practising certificate for four months. In addition, the committee further ordered Wong to pay a penalty of HK$50,000 and costs of the disciplinary proceedings of HK$63,704. When making its decision, the committee took into consideration the relevant facts of the complaint, Wong’s conduct throughout the proceedings and his admission of the complaint. Details of the disciplinary finding are available on the Institute’s website.
For enrolment From Masters of Digits to Masters of Digital Transformation – Understanding the use cases, key learnings and necessary technologies to make digital initiatives successful for organizations big and small Date: Saturday, 22 October 2022 I Time: 9:00 a.m. - 12:30 p.m. IT VIRTUAL CONFERENCE 2022 Platinum sponsor
More information and enquiries Tel: 2287-7214 / 2287-7508 Web: www.hkicpa.org.hk/bvp E-mail: bvprogramme@hkicpa.org.hk Valuation Fundamentals Transactions Valuation Financial Reporting Valuation Valuation Application Join the Business Valuation Programme and become a valuation specialist through learning about: Our tutors with extensive industry knowledge and practical valuation skills will share with you the business valuation essentials and use case studies to demonstrate the application of various valuation approaches and how to review valuation reports. Who should enrol? Users of business valuation reports, including audit professionals, directors of boards, preparers of financial statements, fund managers, as well as individuals who are keen to gain knowledge in business valuation. Visit www.hkicpa.org.hk/bvp for more information Business Valuation Programme Now recruiting for October
NEWS Business The percentage increase in overall trading volumes in the four Hong Kong-listed exchange traded funds (ETFs) traded by Mainland investors through a new connect scheme in August. Trading volumes for the four ETFs hit HK$8.16 billion last month, up from HK$4.31 billion in July. There are 83 Mainland Chinalisted ETFs trading via the ETF Connect, which launched on 4 July. 1698 The stock code of Tencent Music Entertainment Group, which is set to list on the Hong Kong Stock Exchange next month. It will be the second listing for the music streaming company, which is controlled by Chinese social media giant Tencent Holdings and backed by Spotify, and will come less than month after Mainland China and the U.S. signed an agreement to grant the U.S. Public Company Accounting Oversight Board access to Chinese audit data. Travel and tourism stocks rebounded on 23 September, the same day the Hong Kong government unveiled measures to scrap mandatory hotel quarantine this month. Chinese online travel agency Trip.com increased by 5.1 percent to HK$206.80 per share, while the city’s flagship carrier Cathay Pacific Airways went up by 1 percent to HK$8.92 a share. Hotel and restaurant operator EGL Holdings rose by 36 percent to HK$ 1.05 while HK&S Hotels climbed by 3.2 percent to HK$7.19, reported the South China Morning Post. September 2022 7 The name of a Netflix documentary released this month that investigates the downfall of insolvent German payment companyWirecard AG. Its former chief executive officer, Markus Braun, faces up to 15 years in jail after he was charged in March with fraud, breach of trust, and accounting manipulation. The company announced in June 2020 that €1.9 billion (HK$14.2 billion) in cash was missing, four days after EY auditors refused to sign off its 2019 accounts. – A statement Accounting for Sustainability (A4S) posted on its website following the passing of Queen Elizabeth II on 8 September. Her son, who will succeed her on the throne as King Charles III, founded A4S in 2004 and is a longtime supporter of the profession’s role in driving sustainability reporting. “There is a very high chance for Hong Kong to record a negative GDP growth for this year.” Hong Kong’s ranking as a leading financial centre, according to Global Financial Centres Index, a biannual report released this month by the China Development Institute and Z/Yen Partners which evaluates 119 financial hubs globally. The city, which ranked third in the previous index issued in March, was overtaken by Singapore. This month’s report ranks NewYork in first place and London in second place. Despite Hong Kong doing away with mandatory hotel quarantine on 26 September, the city’s almost three-year-long restrictions have had a negative impact on its economy. Singapore opened its borders to all fully vaccinated travellers in April. 90% Skandal! Bringing Down Wirecard – Paul Chan FCPA, Hong Kong’s Financial Secretary, told reporters on 22 September. Hong Kong, which has recorded two consecutive quarters of negative growth this year, will likely end the year in a recession, according to Chan, who cited rising interest rates and the city’s existing COVID-19 controls as factors that are affecting the economy. The number of Chinese companies that face potential delisting from exchanges in the United States, following a probe into the audit working papers of PwC andKPMG inHongKong, according to the South ChinaMorning Post. Teams of U.S. audit inspectors from the Public Company Accounting Oversight Board arrived in the city this month and have begun scrutinizing documents and interviewing accountants to ensure the firms have the right quality-control systems in place. 160+ The title of an action plan issued by the International Federation of Accountants that seeks to enhance the profession’s contribution to, and support of, a robust anti-corruption ecosystem encompassing a diverse array of participants and policies. More information can be found in Technical news on page 39. IFAC’s Action Plan for Fighting Corruption and Economic Crime 4th APLUS “We are greatly saddened to learn of the death of Her Majesty The Queen. We send our deepest condolences to our Founder, His Majesty The King Charles, and members of the Royal Family at this time.”
Photography by Leslie Montgomery Panellists at this year’s Annual Taxation Conference discussed the impact of the proposed refinements to Hong Kong’s foreignsourced income exemption regime, and how the tax system should keep up with the rapidly evolving crypto space. Nicky Burridge reports. In October 2021, the European Union (EU) placed Hong Kong on the so-called grey list or watchlist of tax cooperation due to concerns about the tax treatment of offshore passive income. Based on its territorial source principle of taxation, Hong Kong generally does not impose profits tax on foreign-sourced passive income. However, the EU is concerned that businesses could exploit the rules by setting up shell companies in Hong Kong without having a substantial economic presence here and, potentially, benefit from “double non-taxation.” To strengthen Hong Kong’s status as an international financial centre, minimize reputational risk arising from A NEW ERA FOR Annual Taxation Conference 2022 TAXATION SPEAKERS: (from left) Irene Lee CPA, Partner, Global Transfer Pricing Services, KPMG China Gwenda Ho CPA, Partner, Tax Services, PwC Hong Kong, and a member of the Institute’s Taxation Faculty Executive Committee (TFEC) Eugene Yeung CPA, Tax Partner, KPMG China, and Deputy Chair of the TFEC Benjamin Chan CPA, Deputy Commissioner (Technical) (Acting) of the Inland Revenue Department Grace Tang, Partner, Global Compliance and Reporting Services, at EY Tax Services Limited, and a member of the TFEC Doris Chik CPA, Partner, National Tax Technical Centre, Deloitte China 8 September 2022
non-compliance with international tax standards and protect Hong Kong businesses against potential defensive measures that the EUmay implement if its concerns are not addressed, the government has made a strong commitment to refine Hong Kong’s foreign-sourced income exemption (FSIE) regime for passive income. Against this backdrop, there are various key principles that will be upheld, which includes maintaining Hong Kong’s territorial source principle of taxation and its simple and low-tax system, as well as ensuring that the compliance burden of corporates will be minimized. The issue on the upcoming tax rules on foreign-sourced passive income was one of a number of taxation challenges companies are grappling with in the digital era that was explored during a panel discussion at the Hong Kong Institute of CPAs’ Annual Taxation Conference 2022 in July. Taxing intellectual property To meet the EU’s requirements, the refined FSIE regime is due to come into force on 1 January 2023. The revised rules will see foreignsourced passive income, including income from intellectual property (IP), be deemed to be sourced from Hong Kong and be subject to profits tax, if the income is “received in Hong Kong” by a taxpayer that is a constituent entity of a multinational enterprise group and that does not meet the relevant test of having substantial economic activities or nexus in the city applicable to the type of income. Benjamin Chan CPA, Deputy Commissioner (Technical) (Acting) of the Inland Revenue Department (IRD), explained: “The very important thing is that as long as IP income is not received in Hong Kong within the meaning to be provided under the Inland Revenue Ordinance (IRO), it continues to be exempt from HONG KONG TAX APLUS September 2022 9
Hong Kong tax, as only foreignsourced passive income received in Hong Kong by a covered taxpayer will be taxable in Hong Kong.” For foreign-sourced IP income that is received in Hong Kong, the nexus approach adopted by the Organization for Economic Co-operation and Development (OECD) will be used to determine the granting of tax exemptions. Under this approach, income from certain IPs (i.e. patent and patentlike IPs) will have preferential tax treatment based on a nexus ratio, which is defined as the qualifying expenditures of the Hong Kong constituent entity as a proportion of the overall expenditures that have been incurred by the taxpayer to develop the IP. Chan explained that in this context, the proportion of research and development (R&D) expenditures will be used as a proxy for substantial economic activities. This aims to ensure that there is a direct nexus between the income receiving benefits and the expenditure contributing to that income. Doris Chik CPA, Partner, National Tax Technical Centre, Deloitte China, pointed out that the nexus approach Hong Kong proposes to take in determining the extent to which IP income can be exempted under the FSIE regime contains most of the key features set out by the OECD. With the jurisdictional approach to be adopted, qualifying R&D activities carried out by the taxpayer have to be carried out in Hong Kong to benefit from the tax exemption. Chan noted that qualifying R&D expenditures, under the nexus approach, could also include expenditures incurred by the taxpayer for R&D activities outsourced to an unrelated party that are carried out either inside or outside Hong Kong, while excluding activities outsourced to a related party outside of Hong Kong. “There is no room for us to deviate from this international standard,” he says. But Chan added that, under existing rules, as an incentive for local R&D activities, Hong Kong companies can claim enhanced deductions for qualifying R&D expenditures in Hong Kong (of 300 percent for the first HK$2 million and 200 percent for the remainder). He said that while the government is currently focusing on the income side of the taxation of IP, on the deduction side, it has always welcomed ways to refine the tax system to promote R&D activities in Hong Kong. “We will continue to listen to industry views to see how best we can refine the deduction side or even the income side to encourage more R&D activities in Hong Kong. I would like to emphasize that it has always been the government’s policy to encourage such activities to be conducted in Hong Kong.” However, Irene Lee CPA, Partner, Global Transfer Pricing Services, KPMG China, expressed concerns about the tax treatment of companies that have set up R&D centres outside of Hong Kong to benefit frommaking some of their profits in a low tax jurisdiction. “This [arrangement] would involve Annual Taxation Conference 2022 TAXATION “We will continue to listen to industry views to see how best we can refine the deduction side or even the income side to encourage more R&D activities in Hong Kong.” 10 September 2022
APLUS foreign entities participating in a cost-sharing arrangement, so the Hong Kong entity may bear R&D costs, and if they are subcontracting that function out, they will be paying tax in Hong Kong, but not having the R&D costs deducted. As a result, it may diminish the attractiveness of having a costsharing arrangement,” she said. Eugene Yeung CPA, Tax Partner at KPMG China, Deputy Chair of the Institute’s Taxation Faculty Executive Committee, and Convenor of its Taxation Faculty Budget Proposals Subcommittee, who was moderating the panel discussion, pointed out: “Based on recent discussions with the government and IRD on the FSIE and various topics, I think enhancing Hong Kong’s competitiveness is definitely on top of the government’s agenda. It is also very aware of the need to protect Hong Kong’s competitiveness when rolling out the FSIE regime.” Meanwhile, Grace Tang, Partner, Global Compliance and Reporting Services, at EY Tax Services Limited, and a member of the Institute’s Taxation Faculty Executive Committee, expressed concern that the current deduction system for R&D expenses may lead to multinational enterprises having a lower effective tax rate under the new base erosion and profit shifting 2.0 requirements. “This systemmay not be beneficial to multinational enterprises considering whether to set up R&D centres in Hong Kong because this may result in Hong Kong enterprises having an effective tax rate below the global minimum tax rate of 15 percent, and so having an enhanced deduction may mean they have to pay more ‘top-up’ tax.” Instead, she suggested Hong Kong should introduce a refundable tax credit, similar to that in Australia and Ireland, to encourage more multinational entities to use Hong Kong as an R&D base. Chan appreciated the suggestion, though cautioned that under such a system, the government would not only forgo revenue but would also face a cash outlay that could have some impact on the government’s fiscal position. Guidance on cryptocurrency Addressing other areas of the digital economy, panel members pointed out that there was still some uncertainty over Hong Kong’s tax treatment of cryptocurrency, with Yeung asking whether the government was considering providing more guidance or making a legislative amendment in this area. Chan explained that, before the government considers making any changes to its rules in relation to the taxation of certain types of income, it needed to consider whether any new principles or rules were necessary; whether the existing rules could adequately address the general concerns or cater for the taxation of that income. “From our observations, we can still apply our basic tax principles based on whether the asset is a revenue asset or a capital asset, and whether the taxpayer is receiving the revenue in Hong Kong.” As a result, he said the government did not see a forthcoming need to change the law, although he added that it is contemplating to introduce some guidance on the taxation of crypto assets to reflect new developments “Having an enhanced deduction may mean they have to pay more ‘top-up’ tax.” September 2022 11
in this area. Gwenda Ho CPA, Partner, Tax Services, at PwC Hong Kong, and a member of the Institute’s Taxation Faculty Executive Committee, agreed: “We don’t actually need any legislative changes generally because the existing framework is sufficient for most of the issues, but I do agree that a bit more guidance would be helpful.” But she added that, as it takes time for the IRD to update Departmental Interpretation and Practice Notes, there was a danger that by the time updates were made, they would already be outdated. Instead, she suggested that the IRD could consider issuing other forms of guidance, such as “frequently asked questions” on its website, which is something other countries have done. “That would be helpful to keep taxpayers abreast of these developments and help them to understand their tax position,” she says. Ho also pointed out that when dealing with tax questions from clients, it is necessary to understand the details of the business model and income flow, as well as to consider the accounting treatment. But where cryptocurrencies are concerned, there is a lack of precedents from an accounting perspective. “Our accounting team needs to apply existing accounting standards on these new types of models, which is actually a very complicated process. If the IRD could provide some examples that would be helpful.” Lee said that the challenge is further compounded by the fact that companies in the crypto space are often evolving very quickly. “We have a player that when they reached out to us, had 2,000 people in the group, who were quite scattered around the world. We were helping them with a complicated central entrepreneur business model, and how to split the profits they gained between different jurisdictions where core people were located,” she explained. “But two-to-three months into the project, they told us they now had 6,000 people, and we had to look at the functions again, and whether our transfer pricing model would still work and apply.” Lee added that another issue for accountants dealing with digital business models was how to classify some of the entities around the central company. “Under our transfer pricing model, we call them routine service providers, but sometimes the way we classify them may not accord with what the regulators think.” She explained that some regional exchanges in the crypto space do not have many staff, as they perform an automated function, but regulators do not always agree with defining them as a routine profit entity. “We have to think about how to define them from a transfer pricing perspective to the regulators, to ensure the model still works,” Lee said. Another problem is that crypto players may experience significant losses, which they want to split across their different jurisdictions and entities. “But tax authorities in jurisdictions, where what we define as ‘simplified routine entities’ are Annual Taxation Conference 2022 TAXATION “Our accounting team needs to apply existing accounting standards on these new types of models, which is actually a very complicated process.” 12 September 2022
APLUS located, may ask why these entities are taking a loss when they don’t get any of the upside when there is a profit. There are a lot of these kinds of issues that we have to think about. It is different from the traditional business model,” Lee said. A holistic review of taxation Going forward, Chik would like to see a holistic review of Hong Kong’s tax regime to ensure that the city’s competitiveness is not impacted by the new rules under the refined FSIE regime. “Because of FSIE, I think more IP income, such as income from patents and licensing fees that used to be foreign-sourced, will be taxed in Hong Kong, and the deductions are very limited under the current tax system. It puts Hong Kong at a disadvantage if income is taxable, but expenses cannot be deducted,” she says. Instead, she suggested that Hong Kong could consider having a separate tax regime for onshore IP income to see if it would encourage more companies to base their R&D in Hong Kong. Yeung went further and said he would like to see a holistic review of Hong Kong’s entire tax system. “It was first written in the 1940s and the recent changes have been put into the IRO in a piecemeal way. A review to ensure the new regimes do not conf lict with other parts of the IRO would be useful.” But Chan pointed out that conducting a review of the whole tax system is a time-consuming exercise, and could lead to the rules being less responsive to developments in both the business and technology sectors. “Our reasoned approach to introduce new measures or amend our law whenever we come across new problems or developments appears to be a more appropriate approach for the time being,” he said. One change Ho would like to see is the inclusion of crypto assets as qualifying assets for the unified fund exemption. “We hope that the government can consider extending the unified fund exemption to cover assets under crypto funds, so that more of these activities can be done with a better tax outcome,” she said. Lee would also like to see regulations and guidelines relating to the digital world kept up to date, particularly from a transfer pricing perspective. “People say transfer pricing is an art not a science, but I would still like to have the lines drawn out so I know how we can set up everything, and how transfer pricing will work out,” she said. Concluding the panel, Yeung said: “Technology advancement is one of the key drivers for economic growth and it is also the government’s plan to develop Hong Kong into a technology centre to enable it to develop and integrate into the Greater Bay Area. We, as professional accountants, should continue to keep up to date and the Institute will continue to propose different measures and changes to the government and the IRD.” The European Union announced in October 2021 the inclusion of Hong Kong in its watchlist on tax cooperation as it considered that the non-taxation of certain foreignsourced passive income in Hong Kong might lead to situations of “double nontaxation.” In response, Hong Kong is refining its foreignsourced income exemption regime for passive income to bring it in line with international standards. “A review to ensure the new regimes do not conflict with other parts of the IRO would be usefuI.” “People say transfer pricing is an art not a science, but I would still like to have the lines drawn out so I know how we can set up everything, and how transfer pricing will work out.” “It puts Hong Kong at a disadvantage if income is taxable, but expenses cannot be deducted.” September 2022 13
PROFILE Ricky Chu 14 September 2022
APLUS Hong Kong’s anti-discrimination watchdog believes diversity, equity and inclusion is as much of a business issue as it is a social one. Ricky Chu, Chairperson of the Equal Opportunities Commission, tells Jemelyn Yadao how inclusive workplace practices can benefit business, how CPAs can help make diversity a reality within organizations, and the wide scope of the issues he is tackling At a time of global economic uncertainty, most companies will likely be more focused on building up a financial cushion than on making the workplace more diverse and inclusive. This reality bothers Ricky Chu, Chairperson of the Equal Opportunities Commission (EOC). “There’s this misleading perception that in times of recession, companies should find ways of making money instead of spending resources on abstract issues like diversity, equity and inclusion (DEI). But this is not a true picture,” he says, referring to policies and programmes that promote the representation and participation of different groups of people. Citing a Fortune magazine analysis, Chu points out that from 2007 to 2009, while stock prices for S&P 500 companies plunged, companies that continued to honour their DEI commitments saw gains averaging 14.4 percent. “The truth is that if you achieve workplace DEI, even during a harsh economic environment, in the long term you get a more robust group of staff that can contribute innovative ideas. Your company’s reputation would be better, and it will attract more clients,” says Chu. “So we should encourage all components in a company – members of management, accountants, frontline staff – to pay attention not only to direct profit-making activities, but to creating a work environment where DEI is an essential consideration.” As well as the topic of why DEI matters, the EOC is vocal about various other issues relating to discrimination. It has been particularly active recently in responding to discrimination issues related to COVID-19, and providing suggestions to tackle them. Like the Hong Kong Institute of CPAs, the EOC was established as a statutory body. It is responsible for implementing and enforcing the four anti-discrimination ordinances, namely the Sex Discrimination Ordinance (SDO), the Disability Discrimination Ordinance, the Family Status Discrimination Ordinance, and the Race Discrimination Ordinance, and investigates and seeks to resolve disputes in connection with these four ordinances. “Our establishment is based on the Photography by Calvin Sit CULTIVATING HARMONY September 2022 15
PROFILE Ricky Chu passing of the SDO, which was the first anti-discrimination ordinance enacted in Hong Kong in 1995. It governs our approach as to howwe tackle anti-discrimination. Our ultimate goal is to help build Hong Kong into an inclusive, diverse and harmonious society,” explains Chu, who was reappointed Chairperson of the EOC in March for a two-year term. “But alongside the issue of discrimination comes the issue of harassment,” says Chu, adding that the EOC has legal powers to protect people from sexual harassment, harassment on the grounds of breastfeeding, as well as harassment on the grounds of disability and race. The nature of a discrimination claim is a civil dispute between the parties concerned. The threshold for the EOC to take legal proceedings and assist a person to pursue a complaint in court is therefore comparatively low, he explains. “If the EOC is trying to prove a harassment act or discriminatory practice in existence, the level of proof that we need to achieve is a balance of probabilities – is it more likely that the misbehaviour happened than not? Unlike in criminal cases, where the prosecution has to prove to the level of beyond reasonable doubt.” Resolving disputes between parties through conciliation is a key part of the EOC’s complainthandling process. “Upon receiving a complaint in writing, the EOC will assess whether the allegation falls within the protected areas of the anti-discrimination ordinances, if so, follow-up actions will be taken by the EOC in accordance with the law. In the course of investigation into a complaint, the EOC will endeavour to help the complainant and the respondent reach a settlement by way of conciliation, which is entirely voluntary. The spirit of all the anti-discrimination ordinances aims to iron out differences, trying to achieve a mutual consensus,” he says. On average, eight out of 10 cases attempted for conciliation are resolved successfully and not taken to court, says Chu. “We also grant legal assistance to about 10 to 20 cases every year, out of more than a 1,000 complaints that we receive annually.” About 80 percent of the complaints the EOC has received are related to employment. Chu says that many cases that have recently gone to court are also pandemic-related. “We had a case where the employee Before Ricky Chu first joined the Equal Opportunities Commission in April 2019, he worked at the Independent Commission Against Corruption, and was the secretary-general of the Independent Police Complaints Council. 16 September 2022
APLUS alleged the employer dismissed him because he had contracted COVID-19. In another case, the employee did not go to work shortly after being recruited because he suddenly contracted COVID-19 and was hospitalized. The employer then no longer wanted to hire that person. This would be unlawful under the Disability Discrimination Ordinance.” Addressing gender imbalance Among companies listed in Hong Kong, women hold about 16 percent of board seats in 2022, according to the Hong Kong Stock Exchange (HKEX). To improve gender diversity at board level, starting from July the HKEX requires companies seeking to list in Hong Kong to have at least one director of a different gender. It has set a deadline of 31 December 2024 for every listed company to ensure their boards do not comprise just a single gender. Chu sees the move as progress particularly as Hong Kong has been lagging behind in a global trend towards more diverse boardrooms. “Our number of female board directors is much lower than the number of female board directors of companies in the United States, Canada, Singapore, and Australia. We urged the HKEX, when it was reviewing its corporate governance code and related listing rules, to firmly advise listed companies to not just have a symbolic figure of one female in the board of directors. We actually encouraged having one-plus.” Beyond the boardroom, Chu pushes for more gender diversity in leadership roles across the public and business sectors, and notes that companies failing on gender diversity risk missing out on top talent. He highlights a 2020 study the EOC jointly conducted with The Chinese University of Hong Kong titled A Study on Public Attitudes towards Female Political Leadership. “The study found that one of the main hurdles barring women from joining the top echelons of company directors are the traditional social biases against females,” Chu explains. “We think that the ultimate solution is for society to change this kind of double standard. Many don’t believe that men should take care of home affairs but that women should. We urge employers both in the public sector and private sectors in Hong Kong to make reasonable accommodations to develop an environment that allows female employees to move upwards in their careers because they have the potential to really move up.” The business case Chu says accountants can play a key role in creating a more inclusive corporate culture. “Accounting and auditing nowadays are not only about figures but about corporate governance. In preparing annual reports and in analysing the financial data, accountants’ recommendations should also include how the company can utilize available resources, either the surplus or through relocation of available funds, to meet the needs of staff in terms of workplace DEI. They have that insight.” With decision-making in business mainly driven by facts and figures, Chu believes accountants can also help companies move beyond treating diversity and inclusion as a box-ticking exercise. “I know in reality there are still some companies that just focus on fulfilling the minimum environmental, social and governance requirements. The ticked boxes approach is a good first step, but now that we have it, accountants can help management to substantiate that tick through sharing what areas they think companies should focus on based on their detailed financial analysis,” he says. While diversity and inclusion may be a good thing for the world, Chu understands that this is not enough for some companies to start making it a priority. This is why the biggest hurdle to successfully implementing DEI initiatives at an organization is a mindset change, Chu notes. “Very often when staff or the management are asked to consider a newDEI-related initiative, there is usually some resistance as a result of traditional mindsets. ‘Howwill this initiative affect business results or key performance indicators? Will this slow down business growth?’” he says. “So we think the solution is to push this change from the top, the board of directors. The second hurdle would be motivating the frontline staff and getting them to accept this concept so that they can come up with some practical measures that are workable.” In this regard, Chu stresses the importance of a diverse staff profile. “The more diversified the staff profile is, the easier it would be for them to think of practical and successful measures in DEI.” In 2018, the EOC launched the Racial Diversity and Inclusion Charter for Employers, which gives interested employers a checklist of policies and practices they can implement to further their diversity and inclusion objectives. “We thought that if we could obtain a sufficient number of signatories consisting of companies of various sizes then we could strengthen our communication with these companies, and use the charter as a platform to exchange best practices to achieve a more racially embracing workplace,” says Chu. Convincing companies to sign up to the scheme was difficult at “The ticked boxes approach is a good first step, but now that we have it, accountants can help management to substantiate that tick.” September 2022 17
PROFILE Ricky Chu the start, he adds, with the first batch of signatories being mostly international companies in Hong Kong, including the Big Four firms. “In March 2019 when I first joined, we only had 11 companies signed up. Nowwe have more than 230. I really commend the accounting profession’s efforts as it was one of the prime supporters of the charter from the early stage.” Raising acceptance With Chu’s reappointment as EOC Chairperson, he hopes to complete, if not make good progress, on certain projects. He is now focusing on exploring legislative amendment to advance equality for people in Hong Kong identified by their sexual orientation, gender identity or other sexual characteristics . Indeed, the issue of lesbian, gay, bisexual, transgender and intersex (LGBTI) rights in Hong Kong, particularly in relation to getting same-sex marriage legally recognized, is a huge and complex topic involving many layers, notes Chu. “To be honest, if you focus on achieving this goal of legalizing same-sex marriage, then the matter will drag on for many years without success. The way I would tackle the issue is to separate the problem into three levels,” says Chu. The first level, he explains, is personal benefits (The rights of LGBTI individuals in the areas of education, employment, provision of goods and services, etc.). The second level is rights relating to relationships (taxation rights, inheritance and property rights, parental and other family rights etc.). The third level is same-sex marriage. “I think it has to be considered in isolation as it is the most complicated factor and affects the whole society,” Chu explains. “I intend to implement this approach by first studying howwe can actually amend our sex discrimination law to achieve the first level of rights.” Another priority for Chu is to continue tackling specific areas of discrimination through creating specialized units. “We already have an ethnic minorities unit to deal with all racial matters, and an anti-sexual harassment unit to deal with issues involving sexual harassment, which is a very important concern. I have in mind that we should now look at disability issues because people with disabilities in Hong Kong make up almost 8 percent of the entire population, which is more than 600,000 people. There are different categories of people with disabilities, making this a very complex issue to tackle because their needs are different,” he says. Chu adds that the EOC calls for employers to adopt universal design in the workplace so that all products and the work environment are fully usable by everyone, including those who are differently abled. “By making suitable adjustments to the workplace environment, for example by ensuring computers are equipped with applications that allow people with visual impairment to work, companies will be able to recruit more staff with different abilities, which will allow them to have a better life. We will need a specialized unit to raise awareness on this.” Anti-corruption to anti-discrimination Chu’s first job after graduating from The Chinese University of Hong Kong was as a secondary school geography teacher. A colleague who suddenly left the school led to the start of his lengthy career in law enforcement. “I found out that he had left to become an Independent Commission Against Corruption (ICAC) investigator. That inspired me to also apply for a job at ICAC,” he says. “My childhood dreamwas to become a law enforcement officer because I thought it was an effective way to help society, especially the poor. I must have watched too many police movies,” he laughs. His strong background in investigation, operations, management and public administration can be attributed to the many years he worked at ICAC. He joined in 1978 as an investigator and rose through the ranks to become assistant director in 2010, responsible for investigations into private sector corruption. Then, following a headhunter call, he became secretary-general of the Independent Police Complaints Council (IPCC) in 2011. As part of his role, he led and oversaw the restructuring of the council. “IPCC was established according to the enactment of the IPCC Ordinance in 2009 but before that it was a small administrative unit looking over the shoulder of the Complaints Against Police Office. With the enactment of the law, the IPCC needed to be an independent organization. So my job then was to set up a brand new operating system to enable the independent handling of complaints against the police, and recruit staff outside the government, which was both challenging and satisfying,” he says. Chu stayed there for over five years before rejoining the ICAC in 2016 as the director of investigation. The same headhunter who called Chu about the IPCC job, called him again four months before he was scheduled to retire, this time about the Chairperson role at the EOC. “After getting the call, and in preparing for the interview, I read about the EOC and its anti-discrimination work and it immediately aroused my interest,” he says. “I could see that anti-discrimination work is so meaningful in Hong Kong because the scope is so wide. Much wider and deeper when compared with “I could see that antidiscrimination work is so meaningful in Hong Kong because the scope is so wide.” 18 September 2022
APLUS corruption issues.” Chu also realized that outside the four statutory areas of discrimination, there were many other areas of discrimination and inequality where a lot of work needed to be done. He also faced the issue of Chinese values and traditions being incompatible with some of the issues the EOC advocated on. “While Hong Kong is a modern, developed economy, there are still a lot of deep-seated, traditional values that we need to reshape,” says Chu. These challenges, however, were not enough to deter him from taking up the post in April 2019. “I imagined how satisfying it would be to put my hands on these issues and help resolve them.” Logical yet caring Chu is a marathon runner. While supporting his son, who was participating in a 10-kilometre race in Tseung Kwan O, Chu spotted an elderly man, known as “Uncle Yip,” running at an impressive speed. “I later found out that he started running at age of 50 and he instantly became my idol,” he recalls. Chu then took up running – he was 49 – and three years later in 2006 he completed his first marathon. Thanks to Uncle Yip, he is now a strong runner who, before COVID-19 restrictions, took part in marathons at least once a year, runs half-marathons once a month and does 10-km runs on a weekly basis. He also loves playing bridge, and credits the tricktaking card game for developing his ability to take a logical and balanced approach to decision-making in his previous and current roles. “I think a person in these kinds of positions must possess two contrary characteristics. One is a logical and calm mind, but on the other side, you need to be compassionate. I need to be empathetic without losing my reasoning power. It’s a tricky balance. Without this, you won’t achieve the results you want,” he says, adding that this way of thinking helped him formulate his three-level strategy for tackling the issue of LGBTI rights. Chu believes both his hobbies integrate to some extent into his professional life. Running marathons built up his resilience both on the track and in the endless pursuit of understanding and acceptance of diversity and equal opportunities. “To do the job well at the EOC, you have to be committed. You have to believe in the cause,” he says. “Of course, there is no way that I can complete all these tasks and resolve all those longstanding problems relating to discrimination. But if I can achieve something in my tenure as the Chairperson, then I can make my contribution to Hong Kong.” To further promote awareness among businesses on the benefits of implementing inclusive policies and practices, the EOC introduced its Equal Opportunity Employer Recognition Scheme in 2020. The scheme recognizes the achievements of employers that demonstrate a commitment to equal opportunities, diversity and inclusion in corporate strategies. Chu was reappointed the Chairperson of the Equal Opportunities Commission for a term of two years commencing from April. His focus is now on raising awareness on the issues such as those faced by people with disabilities. September 2022 19
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