Kitty Mok, Group Company Secretary and Director of Risk at Pacific Basin Shipping Limited, on thriving amid disruption and the lessons she has learned during her 25-year-long career in the shipping industry Issue 3 Volume 17 March 2021 DRIVING BUSINESS SUCCESS PLUS: PROFILE Len Jui, Deputy Chair of the International Auditing and Assurance Standards Board REACHING NEW STANDARDS What will new Quality Management Standards mean for the profession? SECOND OPINIONS How will the recently announced changes to the Hang Seng Index enhance Hong Kong’s status as an international financial centre? STAYING ABOVE IT ALL
PRESIDENT’S MESSAGE APLUS March 2021 1 On 1 March the Institute released the consultation paper on a proposed framework for the one member one vote election of the President and Vice-Presidents. This is the outstanding action from the Extraordinary General Meeting held in March 2018. The consultation paper proposes an election model developed by an Independent Working Group, and endorsed by Council, albeit with divergent and divided views on the model. On behalf of the Leadership Team, I urge you to read and consider the consultation paper as well as the accompanying message from the Leadership Team and covering letter from the Council, before responding to the consultation. These proposals are not cast in stone, your views are important for us to help us meet your expectations about how we change our election model. We held two briefing sessions on the consultation paper in late March, one in Chinese and one in English, featuring myself, Margaret W.S. Chan, Chief Executive and Registrar, and other members of the Institute’s management team. These were recorded and are available via the consultation’s dedicated webpage. The webpage also contains the message from the Leadership Team, covering letter from the Council, and the consultation paper, and other useful information about the consultation. We treasure your feedback and look forward to receiving your views on the proposed election framework. The consultation will end on 31 May, after which the Council will then consider the results before responding as soon as is practical. I hope that we can quickly progress with this important governance matter. With the recent news that the government is considering loosening restrictions after the decreasing number of daily local COVID-19 cases, we can now hope for the future. The necessary social distancing restrictions in place over the past year, while important for minimizing the spread of COVID-19, have affected all our lives. One aspect that I know has affected many is the lack of group sports and competition events. Well now that we can see the end of the disruption, we have a treat for our joggers. Although we cannot offer a physical race – we are delighted to offer a virtual race this year. The CPA Virtual Run 2021 welcomes all members to participate in the 10 km races or in the 3 km Fun Run on an individual or team basis. My thanks go to the sponsors of the prizes and gifts for taking part, and the team organizing the run. It should be a fun event and I hope you’ll consider taking part. Register by 5 May, and upload your results on or before 16 May to compete for one of the awards, and obtain a finisher pack. In order to be able to hold largescale competitions and experience more normal times again, enough of us must be vaccinated against COVID-19. The outbreak in the finance community early in the month also showed that we are not immune as professionals. This month, the government expanded the COVID-19 Vaccination Programme and announced that all residents aged 30 and above are eligible to book vaccinations. I urge all members to consider getting vaccinated, and help to protect those in our community who are unable to be vaccinated. Finally, congratulations to the over 650 new members who joined us after the December 2020 examination session of the Qualification Programme (QP). We were so happy to be able to successfully hold the examination session and I thank the Institute’s Education and Training Department for their hard work organizing the session, and ensuring that it could go ahead with the social distancing measures in place. Preparations are well underway for the June 2021 examination session, which features the first sitting of the Professional Level modules of the new QP. “These proposals are not cast in stone, your views are important for us to help us meet your expectations about how we change our election model.” Raymond Cheng President Dear members,
CONTENTS Issue 3 Volume 17 March 2021 NEWS 01 President’s message 04 Institute news 06 Business news FEATURES 08 Revolutionizing the taxation experience A roundtable discussion on how new technologies will help taxpayers and change how tax is paid 14 Second opinions Members of the Institute’s Corporate Finance Advisory Panel on how the recently announced changes to the Hang Seng Index will enhance Hong Kong’s status as an international financial centre 16 Leadership: Len Jui The Deputy Chair of the International Auditing and Assurance Standards Board on the need for better standards and regulation for the profession 22 How to Andre Springett, Manager of Accounting & Finance, HR & Business Support at Randstad Hong Kong, on managing the recovery from COVID-19 23 Thought leadership: Danny Kwan The Partner in China Tax and Business Advisory Services Group of PwC China, on how the Regional Comprehensive Economic Partnership may affect Hong Kong businesses 24 Reaching new standards The implications new IAASB Quality Management Standards will have on the audit profession 32 Accountant plus: Kitty Mok The Group Company Secretary and Director of Risk at Pacific Basin on mitigating risks and handling disruption amid uncertainty 39 Meet the speaker What to expect from the Institute’s new Business Valuation Programme 08 24Reaching new standards Revolutionizing the taxation experience The Institute’s Taxation Faculty invited experts to discuss the benefits of digital tax filing amid the evolving tax landscape, and what professionals and stakeholders must keep in mind to drive this change
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 Copy Editor Jemelyn Yadao Junior Copy Editor Jeremy Chan Contributors Nicky Burridge, Eric Chiang, Erin Hale, Paul Smith, KateWhitehead Art Director Ann Lee Registered Office 2/F, Wang Kee Building, 252 Hennessy Road, Wanchai, Hong Kong Advertising enquiries Advertising Director Derek Tsang Email: derektsang@mandl.asia ISSN 1815-3380 President Raymond Cheng Vice Presidents Rosalind Lee Ken Li Chief Executive and Registrar Margaret W. S. Chan Director of Corporate Communications Dr Wendy Lam Head of Corporate Communications and Member Services Rachel So Editorial Manager Paul Smith 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 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 March 2021. Print run: 7,200 copies The digital version is distributed to all 45,552 members, 18,799 students of the Institute and 2,358 business stakeholders every month. SOURCE 40 Hong Kong’s carried interest tax concessions bill Examining the bill introducing concessionary tax treatment for eligible carried interest 44 Technical news WORK-LIFE BALANCE 48 Planting a seed CPA farmers on why they take time out of the day to sow seeds and be around nature 52 Young member of the month Gigi Pun, Financial Planning and Analysis Manager at Clarins Hong Kong 54 Leisure Plus Spotlight on the best museums to spend a weekend afternoon; what members are currently reading and listening to 56 Let’s get fiscal If you’re royalty, have the right property, says Nury Vittachi 54 48 Planting a seed Leisure Plus 16 Setting the bar Len Jui, Deputy Chair of the International Auditing and Assurance Standards Board, on his foray into the world of standard setting and his international career and life
NEWS The consultation on the proposed framework for the one member one vote election of the President and VicePresidents began on 1 March. Visit the dedicated webpage at www.hkicpa. org.hk/consultation_PandVPelection for the message from the Leadership Team, the Council covering letter, the consultation paper and recordings of the two briefing sessions. Comment via one of the channels detailed on the webpage, including a web questionnaire. CPA Virtual Run 2021 – Join now! Start training for the Institute’s first virtual running event, CPAVirtual Run 2021. 10 km races and a 3 km Fun Run are available for both record-breakers or leisure runners, or those who enjoy running alone or part of a team. Run whenever, wherever and with whomever you want. Upload your best running result on or before 16 May to obtain the finisher pack and compete for special awards. Visit the Institute’s website for details. Postponing the introduction of the four-attempt rule of the new QP Having considered the impact of the COVID-19 pandemic on Qualification Programme (QP) students, the Institute decided to postpone the implementation of the four-attempt rule for both examinations and workshops until the June 2022 session. The number of Associate and Professional Levels attempts by QP students will be counted from the June 2022 session onwards. For QP students who have commenced their Associate Level in December 2020 session, any failed attempt(s) will not be counted. Visit the new QP Information Portal for more information. Business Valuation Programme The Institute is offering the brand new Business Valuation Programme from April to June in collaboration with Savills Valuation and Professional Services (S) Pte Ltd. The programme will cover business valuation essentials and techniques for transaction purposes, and the valuation of various classes of assets and liabilities. Case studies Institute news Business news One member one vote election of the President and Vice-Presidents consultation 4 March 2021
APLUS will be used to strengthen the taught knowledge. Visit www.hkicpa.org.hk/bvp for more details. Read more about the programme on page 39. HKICPA V-fair The HKICPAV-fair returns for 2021. The interactive platform will be live on 17, 20 and 21 April, offering careers advice for aspiring accountants, including information on the QP, and advice on becoming CPAs. Visit the Institute’s website for more details. In memory of Dudley Harding The Institute mourns the passing of Dudley Harding, Past President of Council year 1993, who passed away on 6 March. May Dudley rest in peace and we express our condolences to his family. Taxation Faculty yearbook 2020, Preparing for a complex future Members of the Institute’s Taxation Faculty regularly contribute articles on taxation-related topics to A Plus. The articles from 2020 have been collected together in this new yearbook. The articles cover the wide range of areas, ranging from international taxation agreements, Hong Kong taxation developments, to Mainland China taxation. The yearbook is available on the Institute’s website. Minutes of Council meetings The abridged minutes from the December 2020 (special), January and February 2021 (Strategy Day) Council meetings are now available for members to read. They can be found in the “Members’ area” of the Institute’s website. Disciplinary finding Chung Chi Hang, CPA Complaint: Failure or neglect to observe, maintain or otherwise apply Hong Kong Standard on Auditing (HKSA) 200 Overall Objectives of the Independent Auditor and the Conduct of anAudit inAccordancewithHong Kong Standards onAuditing, HKSA 230 Audit Documentation, HKSA 315 Identifying andAssessing the Risks of Material Misstatement throughUnderstanding the Entity and Its Environment, HKSA 330 The Auditor’s Responses to Assessed Risks, HKSA 500 Audit Evidence, HKSA 505 External Confirmations and the fundamental principle of Professional Competence and Due Care in sections 100.5(c) and 130 of the Code of Ethics for Professional Accountants. Chung was themanaging director of a corporate practice. He conducted the audits of the financial statements of five private companies for the year/period ended 31 December 2017 and signed the relevant auditor’s reports in the name of the practice. Chung expressed an unmodified auditor’s opinion in each of those reports. Deficiencies were found in the five audits. Chung failed to obtain sufficient appropriate audit evidence to support his conclusions that the companies’ service revenue and costs were properly recognized. In addition, Chung inappropriately accepted certain bank confirmations as sufficient audit evidence when those confirmations were not sent to him directly but to a third party and thus their integrity might have been compromised. Further, Chung failed to apply sufficient professional scepticism when following up on the total lack of response to all confirmation requests sent to the companies’ customers and suppliers. Decisions and reasons: Chung was reprimanded. In addition, Chung having not held a practising certificate since August 2019, the Disciplinary Committee ordered that no practising certificate shall be issued to him again for 12 months from 17 March 2021. Further, Chung was ordered to pay costs of the Institute of HK$107,443. Details of the disciplinary finding are available at the Institute’s website. March 2021 5
NEWS Greece raised US$3 billion in a 30-year government bond sale on 17 March that was met with high demand. It was the country’s first sale of 30-year bonds since the financial crisis in 2008, marking its full return to international debt markets. The issue was more than 10 times oversubscribed and saw upwards of US$31 billion of orders, signalling investors’ long-term confidence. The new bond was priced at a yield of 1.965 percent. “This issue marks a full return of our country to international markets. It provides security to investors as it far exceeds the debt-settlement period agreed with [bailout] institutions,” said Christos Staikouras, Minister of Finance of Greece. Business Chinese search engine Baidu debuted its secondary listing on the Hong Kong Stock Exchange on 23 March, raising HK$23.7 billion. The company’s shares rose a modest 0.8 percent above its opening price of HK$254 per share to HK$256.60, before closing the first day at HK$252 a share. Baidu’s much-anticipated debut fell short of investor expectations amid an overall 22 percent decline in the Hang Seng TECH Index. BAIDU LISTS IN HONG KONG GREECE SELLS FIRST 30-YEARBONDIN MORE THAN A DECADE Hong Kong will soon have a framework for special purpose acquisition companies (SPACs) to list in the city. Bloomberg reported on 29 March that the city is putting together a SPAC listing framework by June for public feedback and is targeting the first such deal by the end of the year. SPACs are “blank check” companies that raise capital through initial public offerings (IPO) with the intention of merging or acquiring an existing private company in order to take it public. The rules for sponsors of SPAC listings and their buy-out targets are expected to be stricter than in the United States, to address concerns about the hundreds of publicly-traded shell companies that have raised money on U.S. stock exchanges, where most SPACs are listed. Once approved, Hong Kong will be the first market in Asia to approve such companies for listing. JOE BIDEN VOWS TO INCREASE TAXES ON ANNUAL INCOMES OVERUS$400,000 HONGKONG TOHAVE FIRST SPAC LISTINGBY THE ENDOF THE YEAR U.S. President Joe Biden has vowed to raise taxes for households whose annual incomes exceed US$400,000 under his forthcoming economic programme, a decision that highlights his administration’s plans to address the inequality gap. The move, which some observers says is the first major tax increase since 1993, will help pay towards the historic US$1.9 trillion pandemic-relief bill that the U.S. Congress has passed into law. “Anybody making more than US$400,000 will see a small-to-a-significant tax increase. You make less than US$400,000, you won’t see one single penny in additional federal tax,” Biden said during an interview on ABC’s Good Morning America that aired on 17 March. KPMG in the United Kingdom has sold its restructuring business to private equity company H.I.G. Capital in a deal reportedly worth £400 million. The move, which the firm hopes will address conflict of interest concerns related to simultaneously servicing audit and non-audit clients, follows Deloitte U.K.’s sale of its restructuring arm to advisory company Teneo last month. KPMG’s restructuring unit, which has 22 partners and more than 500 staff members, will be the U.K.’s largest independent restructuring team following the sale. Deloitte in Malaysia has struck a US$80 million settlement with the Malaysian government to resolve all claims related to its role as auditor to 1Malaysia Development Berhad (1MDB), the state investment fund caught in a multibillion-dollar fraud involving former Malaysian prime minister Najib Razak, and former subsidiary SRC International. The arrangement is the largest settlement by a firm in Southeast Asia related to the 1MDB scandal, the country’s Ministry of Finance said in a statement on 3 March. The deal came as the government continues to recoup money stolen from 1MDB, which prosecutors estimate to total US$4.5 billion. Deloitte was 1MDB’s third auditor until 2016, following EY and KPMG. KPMG U.K. SELLS RESTRUCTURINGUNIT DELOITTE AGREES US$80MILLION SETTLEMENT IN 1MDBCASE 6 March 2021
APLUS INSURANCE CLAIMS FROM SUEZ CANAL BLOCKAGE TO TOP HUNDREDS OF MILLIONS OF DOLLARS MORE THAN THREE QUARTERS OF CEOS FORESEE GROWTH THIS YEAR, ACCORDING TO PWC SURVEY Total insurance claims stemming from the blockage of the Suez Canal by a 220,000 tonne ship this month are expected to run into the hundreds of millions of dollars, according to Fitch Ratings. The 220,000-tonne Ever Given ship was refloated and freed on 29 March by salvage crews and tugboats. However, salvage costs, lost revenue by the canal authorities, and the impact felt by the hundreds of ships delayed by the blockage will rack up hefty fees for the reinsurance industry, which is still reeling from coronavirus-related losses and natural disasters such as storms in the U.S. and floods in Australia. The Hong Kong Stock Exchange saw an 822 percent increase in funds raised via new listings in the first quarter of the year largely as a result of IPOs from Mainland Chinese tech giants. The increase places the city’s bourse in second place behind the Nasdaq in global IPO rankings. Nasdaq raised a total of US$24.49 billion during the first quarter through 81 companies, while 29 companies raised a total of US$17.05 billion in Hong Kong. It is the best quarter first-quarter period since records began in the 1980s. The surge is likely to continue through the second quarter of the year, with as many as 70 companies having filled out their listing applications. 76 percent of chief executive officers expect to see economic growth this year, according to PwC’s 24th Annual Global CEO Survey. The study, which polled over 5,000 CEOs in 100 countries and territories in January and February, found that the COVID-19 vaccine rollout in many parts of the world, in particular, will be key to positive economic growth in 2021. 36 percent of CEOs are also confident about their company’s prospects for revenue growth in the next 12 months, which is up from 27 percent last year. 49 percent expect to see increased spending on digital transformation projects by at least 10 percent. “At the pandemic’s one year mark, we’re at an inflection point as vaccination begins to ramp up around the world. Although the shape of the recovery remains unknown, it is clear that we cannot simply go back to the way things were before,” said Bob Moritz, Chairman of the PwC International Network. Shares of food delivery app Deliveroo plummeted by 26 percent in its highly anticipated IPO on the London Stock Exchange on 31 March. The IPO, which wiped £2 billion off the company’s value, was already priced at the lower end of its intended range at £3.90 per share to cope with volatile market conditions and the poor performance of other IPOs seen during the last week of the month. One banker, quoted by the Financial Times, called it the “worst IPO in London’s history.” DELIVEROO IPO DELIVERS DISAPPOINTING DEBUT EY in the U.K. has dropped its appeal against a court order to pay Amjab Rihan, a former partner, US$10.8 million in compensation after he sounded the alarm on an auditing scandal. The firm had been scheduled to launch an appeal this year against a court judgment in favour of Rihan, who claimed he was made redundant after he blew the whistle about a Dubai client suspected of laundering money and smuggling gold. He also claimed that EY had muffled his concerns involving large amounts of money being paid out by Kaloti Jewellery International, a Dubai-based precious metal dealer, and about gold bars that had been disguised as silver bars to avoid trade restrictions. EY DROPS APPEAL AGAINST DUBAI WHISTLEBLOWER HKEX SEES 822 PERCENT SURGE IN FUNDRAISING IN FIRST QUARTER March 2021 7
BUSINESS Taxation SPEAKERS: DORISCHIK Tax Director, National Technical Centre, Deloitte EUGENE YEUNG Partner, Corporate Tax Advisory, KPMGChina ALBERT LEE Global Co-Leader and Asia Pacific Leader - Tax Technology and Transformation, EY REVOLUTIONIZING THE TAXATION EXPERIENCE 8 March 2021
APLUS The Hong Kong Institute of CPAs’ Taxation Faculty hosts a roundtable discussion on tax technology and how it will transform the taxpaying experience. Eric Chiang and Paul Smith report. Photography by Calvin Sit Tax authorities around the world have been digitalizing their tax administration in recent years. Hong Kong’s Inland Revenue Department (IRD) shared with the Hong Kong Institute of CPAs’ Taxation Faculty in their annual meeting in 2020 that it planned to build three portals: one for individuals, one for corporates and one for tax representatives for e-filing by 2025. To discuss the technology transformation taking place in taxation, the Taxation Faculty invited seasoned tax professionals to share their insights on tax technology and transformation at a roundtable. The changing international tax environment Doris Chik, Tax Director, National Technical Centre and an Institute member, Deloitte, points to the cross border exchanges of information, beginning with the United States’ Foreign Account Tax Compliance Act in 2010, Country-by-Country Reporting introduced as part of the Organization for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative in 2016, and the OECD’s automatic exchange of information and the Common Reporting Standard in 2017, as key drivers of change. “The tax system has become more complicated in recent years, and tax authorities need to automate the data collection process, while at the same time ensuring the integrity of the data in a cost efficient manner. Going digital is the way to go,” she says. Eugene Yeung, Partner, Corporate Tax Advisory, KPMG China, an Institute member and a member of the Taxation Faculty Executive Committee, says that these requirements may soon see all Hong Kong corporate taxpayers being required to file annual JESSEKAVANAGH Partner, Hong Kong Tax Reporting& Strategy Leader, PwCHong Kong March 2021 9
BUSINESS Taxation “With the wealth of data captured by electronic tax systems, tax authorities can use data analytics for tax audit case selection.” tax returns. “Currently, inactive companies are not required to file tax returns annually. International pressure on tax systems to become more transparent means that these companies are likely to soon be required to file profits tax return annually. This will inevitably increase the workload of the IRD, and automation will be an efficient means of handling this,” he says. Albert Lee, Global Co-Leader and Asia Pacific Leader - Tax Technology and Transformation, EY, sees tax authorities around the world adopting e-filing, with more and more collecting data through an internationally agreed format called XBRL. Standing for “eXtensible Business Reporting Language,” the global framework provides consistency and, hence, enables the exchange of business information between jurisdictions. “For taxpayers, the key will be to capture the source data correctly, so that generating XBRL files can be automated and cost efficient,” he says. Lee also mentioned that there is a trend to make e-filing mandatory or virtually mandatory. Japan has made e-filing for corporations compulsory and similar requirements are also found in the United Kingdom and Singapore. Hong Kong has begun to catch up with its digital transformation. Improving tax authority operations Jesse Kavanagh, Partner, Hong Kong Tax Reporting & Strategy Leader, PwC Hong Kong, points to the benefits technology can provide. “With the wealth of data captured by electronic tax systems, tax authorities can use data analytics for tax audit case selection,” he says. Yeung agrees, noting that by using robotic process automation technologies, work efficiency can improve, and humans can focus on the processes that require judgement. For tax authorities, the drive to go digital can also mean some of the work of the department can be outsourced to data providers. Lee highlights some recent discussions he has had with another tax authority in the region. “I was told that their digital strategy was to leverage other stakeholders, by having the financial institutions, the tax and accounting software companies, and tax agents representatives help execute their digital strategy,” he says. The experience of COVID-19 has also pushed tax authorities around the world to digitalize. In Hong Kong, civil servants from the IRD were working at home, which hindered their productivity, points out Yeung. Digitalizing the tax process, while also ensuring it remains secure, enables staff to work remotely. “COVID-19 has shown that systems have not been up to scratch,” agrees Kavanagh. For taxpayers, an electronic filing system can improve the filing experience, but only if implemented well. “Tax authorities should ensure that the e-filing system collects only the absolutely necessary data,” says Lee. Kavanagh points out that an overcomplicated or demanding system can lead to a decrease in information collected. “The IRD’s recent request for transfer pricing information is a good example of this. The department asked for more information than is contained in the 3-tier documentation requirements, 10 March 2021
APLUS and some taxpayers, particularly those that are local subsidiaries, have real difficulty in gathering this information, leading to difficulties in complying with the requirements,” he says. Tax authorities should try and minimize the work of taxpayers says Chik. “Pre-populated returns, where taxpayers filing returns are only required to check the pre-filled parts are correct and enter new information, improves the efficiency of the system and improves the user experience,” she says. The simplicity of the rules is important for enabling a greater share of the work to be automated advises Yeung. “A possible strategy that some jurisdictions may take is to make use of the opportunity created by digital filing to review and simplify their tax codes. Simplification also decreases the number of elections, unusual items and other elements of tax that are outside the ability of pre-population systems.” This will improve the systems effectiveness and accuracy, he notes. Lee gives the example of the U.K.’s Her Majesty’s Revenue and Customs experience as an early adopter of XBRL and inline XBRL (iXBRL), a version of the framework focused on the electronic rendering of financial information encoded in an XBRL document. “They worked with the registrar of companies, Companies House, to do joint filings for both tax returns and annual filing of company accounts, which makes the system more efficient,” he says. Transforming the legal regime The digital transformation of tax filings cannot be completed without the transformation of the tax authority, infrastructure, approach and laws. “Due to confidentiality requirements under the Inland Revenue Ordinance (IRO), the IRD has been very cautious about information exchanges with other government departments. If it is a policy intention to enhance information exchanges, corresponding changes to the IRO may be required,” Lee notes. Changing the IRO is an important part of the technology transformation. “Without a proper legal basis for the requirements for data to be supplied in a given format, such as filing electronically, taxpayers will lack the certainty they need to plan their compliance activities and may be unwilling to comply with the tax authorities requests,” says Chik. “A thorough mapping of all existing legislation is required so that all issues can be identified,” she continues. Increasing the responsibilities of tax representatives Chik points out that the IRD is considering penalties for service providers including tax representatives who file electronic returns on behalf of their clients. “On the assumption that there is no change in the work nature and service scope of the tax representatives for e-filing, the potential introduction of penalties in the IROwould be unreasonable. E-filing should be seen just as a different mode of delivery of returns, comparable to the traditional paperbased filings,” she says. While the taxpayer experience can be enhanced by the use of technologies, tax authorities should try to limit the burden on tax representatives. “If tax representatives WHAT ARE THE IMPACTS OF DIGITALIZING TURNOVER TAXES? Brazil and China have digitalized their turnover tax collection. In Brazil, an extensive system of mandatory e-invoicing has helped to reduce undeclared sales and complex carousel frauds, where value-added tax (VAT) free goods are imported, sold with VAT paid, but not paying the VAT to the government. Sales and purchases are now submitted in real time to the tax authority, allowing for the detection of sales tax fraud. InMainland China, the State Taxation Administration has embarked on a series of tax digitalization projects since 1994, under the banner “Golden Tax Project.” The current stage, “Golden Tax Project Phase 3,” is focused on harmonizing tax compliance processes and unifying the processes used in each province, including a partial e-invoicing system. For Jesse Kavanagh, Partner, Hong Kong Tax Reporting & Strategy Leader, PwCHong Kong, such a system is a game changer. “With real time data from the e-invoicing system, tax authorities can issue turnover tax assessments straight away,” he says. Efficiency can be improved with digitalization, advises Albert Lee, Global Co-Leader and Asia Pacific Leader - Tax Technology and Transformation, EY. “However, not many jurisdictions have implemented e-invoicing and systems that are capable of automatic assessment systems for turnover taxes,” he says. Digitalization can also reduce fraud according to Doris Chik, Tax Director, National Technical Centre, Deloitte. “With the introduction of the e-invoicing system and better VAT invoice authentication, the risk of fake invoice fraud and tax leakage is significantly lower,” she says. March 2021 11
BUSINESS Taxation are required to certify all information uploaded to e-filing systems, the cost of tax services will increase,” says Kavanagh. He notes that service providers have traditionally not been offering an assurance service on data. Lee notes that challenges due to Hong Kong’s adversarial system needs to be overcome. “The IRD needs to collaborate with taxpayers and tax representatives. The IRD needs to introduce incentives to encourage e-filing,” he says. Involving stakeholders in the changes Ahead of any new systems being introduced, the IRDwill consult stakeholders, including taxpayers and tax representatives, to explain the changes and the newworkflow, and ensure that when the systems are released there are no issues. The timely announcement of details also provides service providers with sufficient time to upgrade their proprietary software to cope with new filing requirements. “Ongoing consultation is important,” says Chik. “Just like the recent soft consultation, we were glad to learn through a question and answer session with the IRD organized by the Taxation Faculty that the IRD intends for the status quo to continue, allowing tax representatives to prepare tax computations by using their proprietary software. The tax representatives may only need to use free-of-charge software to be provided by the IRD to convert the files into iXBRL data files for filing.” Though the Hong Kong tax system is simple, tax computations for certain companies can be complicated she notes. “For instance, apportionment for partial offshore claims. We need to find out means to deal with converting these more complex tax computations into the designated format going forward,” Chik continues. For Yeung, the expectations of what’s possible need be managed. “It is unrealistic to expect that we can automate everything. Perhaps an 80:20 rule applies where 80 percent of taxpayers would go for the virtually mandatory e-filing. Whereas, 20 percent – the digitally excluded population – continue to file paper based returns. Lee advises the IRD to collaborate more with stakeholders in its planning and implementation of the digital transformation programme. “In Singapore, the tax authority asked the Big Four firms, with BECOMING A TAX PROFESSIONAL For those interested in advising businesses on their tax matters, the panellists have the following advice. “You have to have a broad skill set rather than just focusing on the technical,” says Jesse Kavanagh, Partner, Hong Kong Tax Reporting & Strategy Leader, PwCHong Kong. “You may be asked to do something unexpected, so you must be open-minded, and prepared to embrace change and new technologies.” The ability to understand technology and problem solve is as important as an accounting background, says Albert Lee, Global Co-Leader and Asia Pacific Leader - Tax Technology and Transformation, EY. “With tax authorities going more digital, tax professionals need to adapt – the challenges are no longer just about the law or accounting,” he says. Eugene Yeung, Partner, Corproate Tax Advisory, KPMGChina and member of the Institute’s Taxation Faculty Executive Committee, says that mentality is the most important consideration for his firmwhen hiring. “Data is a key element of the process, but technology can be implanted in a ‘non-rocket science’ way,” he says. It is, in fact, important for professionals to be able to think through changes and make recommendations. Tax is a continually transforming specialization, advises Doris Chik, Tax Director, National Technical Centre, Deloitte. “An openness to continuing training and development, and good communication skills are important for tax professionals,” she says. 12 March 2021
APLUS relatively more resources, to pilot e-filing,” he says. By working with software vendors, he advises, the IRD can ensure that the essential features needed are incorporated into the off-the-shelf software used by taxpayers, increasing the efficiency of the rollout of the e-filing platform. Preparing taxpayers The traditional methods used by corporate tax functions may not be capable of answering some of the questions raised by tax authorities’ systems. Taxpayers may therefore need to update their systems to enable their e-filing. Chik notes that many taxpayers have completed or are in the process of digitalizing their systems – including the tax functions – because of the longterm benefits it can bring to their operations through cost savings and other efficiencies. Mirroring tax authorities, where e-filing is the beginning of the process, for corporates the filing is the final stage of their financial reporting processes. In order to enable e-filing, and the filing of the underlying data, corporates must ensure their entire data collection, analysis, and reporting processes are capable of the tasks, and should utilize systems to enable such data transformations. Taxpayers may require support and guidance to change their systems. “We are observing a shift away from standalone tax systems in favour of leveraging existing enterprise systems, such as enterprise resource planning (ERP) systems. The beauty of having just one single system that caters to both the financial accounting and tax needs is that we can have a single source of truth,” says Lee. He notes that in the past year, enterprises have been less willing to invest heavily in updating their ERP systems becauseof COVID-19 disruptions. “Instead, they have been investing in enterprise performance management or corporate performancemanagement systems typically used by finance departments for consolidations, performance management and analysis,” he says. Kavanagh says that tax technology transformation is a workflow enabler for businesses, particularly multinational enterprises. “A capable tax technology system gives you the comfort that the tax processes are done properly in different geographical locations,” he advises. For Yeung, the increasing demands from tax authorities are an important driver to change. “Transfer pricing compliance is becoming more demanding. The ability to produce reasonable value attribution analysis based on the functions, assets and risks of local entities is helpful for avoiding audits,” he says. If a system can capture all the data, it can be easier to conduct transfer pricing modelling, and identify and fix problems speedily, he says. Lee agrees, seeing transfer pricing as a low hanging fruit ripe for improvement with tax technology. The coming BEPS 2.0 initiative will further increase the importance for multinational corporations (MNCs) to model the allocation of profits to entities in different jurisdictions, advises Yeung. Kavanagh points out that this will require MNCs to manage their risks and opportunities between jurisdictions. Moreover, Lee thinks that the Pillar Two Global Anti-Base Erosion proposal of minimum tax rates could be integrated with tax reporting processes. Change must be led from the top, Chik says. “Having a senior enough person within the organization as the sponsor of the technology transformation increases the chance of success.” “We are observing a shift away from standalone tax systems in favour of leveraging existing enterprise systems, such as enterprise resource planning systems.” March 2021 13
The Stock Exchange of Hong Kong has become home to an increasingly diverse range of companies in recent years, thanks to the April 2018 listing regime expansion, which embraced the innovative and techdriven companies of the new economy, weighted voting rights structures, and secondary listings. The best is yet to come. The highly welcome changes to the Hang Seng Index (HSI) will not just see the index more fully reflect the diversity of Hong Kong’s capital market, but also further cement our city’s status as an investment gateway to the new economy, Mainland China, and as an international financial centre. This transformation of the HSI – the biggest in its 52-year history – will see its number of constituents increase from 52 to 80 by mid-2022, with a possible expansion to 100 constituents at a later date. As well as being a welcome expansion of index diversity, this transformation will result in the market capitalization of the HSI increasing to HK$3.3 trillion, its coverage expanding from 56.5 percent to 71.2 percent of the Hong Kong stock market, and overall price-earnings multiples rising from 15.7 times to 19.1 times. With the HSI already the most representative and important Hong Kong benchmark for local and international investors alike, this bold transformation can only enhance its status as an index of choice for portfolios across the world. This, in turn, will provide a welcome boost to Hong Kong capital market’s potential and liquidity, and appeal to the growing universe of index tracker funds. It will also facilitate the development of new investment products that will enable Hong Kong to attract a broader range of investors, and strengthen our city’s status as an important channel for investment in the new economy – with the market having previously been dominated by financials and property – as well as emerging businesses not just in Hong Kong and the Greater Bay Area, but across the Mainland. Hong Kong has already shown its ability to outshine many other markets during difficult times – especially during the COVID-19 pandemic – and the imminent transformation of the HSI can only enhance that lustre. SECOND OPINIONS: HOWWILL THE RECENTLY ANNOUNCED CHANGES TO THE HANGSENG INDEXENHANCE HONGKONG’S STATUS AS AN INTERNATIONAL FINANCIAL CENTRE? SECOND OPINIONS Hang Seng Index EDWARD AU SOUTHERN REGION MANAGING PARTNER, DELOITTE CHINA, CHAIRMAN OF THE INSTITUTE'S CORPORATE FINANCE ADVISORY PANEL, AND AN INSTITUTE MEMBER 14 March 2021 “ This, in turn, will provide a welcome boost to Hong Kong capital market’s potential and liquidity, and appeal to the growing universe of index tracker funds.”
APLUS TIMOTHY SHEN CHAIRMAN, SAFARI ASIA LIMITED, MEMBER OF THE CORPORATE FINANCE ADVISORY PANEL, AND AN INSTITUTE MEMBER The upcoming changes to the HSI have received wide support from Hong Kong’s investment community and retail investors. In addition to improving the benchmark of the HSI’s overall coverage and achieving a more reasonable representation for each industry, the changes also reflect market changes within the new economy, which are driven by technology and pre-revenue biotechnology companies in a more balanced manner. For example, the HSI will prevent leading companies such as Tencent from dominating, as it proposes to lower the upper limit of a single stock from the current 10 percent to 8 percent, similar to the Hang Seng TECH Index, which provides a better risk diversification. The changes will attract more retail investors and institutional funds (especially pension funds) to view the HSI as a benchmark or passive fund tracking for stock allocation strategies. With this increased demand, the turnover rate and trading activities of the constituent stocks will be greatly enhanced, and the importance of the Hong Kong market will increase. With more trading activities and a higher market value of stocks, listed companies in Hong Kong may also enjoy advantages in areas such as capital operation, financing, equity pledge, and frequency of changing hands etc., which will further attract more companies to list on the Hong Kong Stock Exchange. The HSI will also further strengthen the attractiveness of Hong Kong as an international financial centre in the long term, especially as a “gateway” for investing in China’s new economy and connecting to overseas capital and investors. As it is already an established trend for Mainland companies to list both in the United States and in Hong Kong, a greater market capitalization in Hong Kong’s pre-eminent index will ensure a better balanced portfolio of Mainland versus non-Mainland stocks to minimize an over-concentration of Mainland stocks in the HSI. Lastly, the HSI will prevail over other major markets, with the exception of the U.S., by including a greater percentage of the market capitalization of the underlying stock exchange, which will improve Hong Kong’s status as one of the top capital markets. In conclusion, we should expect the HSI to reach higher, record levels in 2021 and the following years to come. “ The HSI will also further strengthen the attractiveness of Hong Kong as an international financial centre in the long term.” WONG CHUN YEE DIRECTOR, CORPORATE FINANCE, OCBC BANK, MEMBER OF THE CORPORATE FINANCE ADVISORY PANEL, AND AN INSTITUTE MEMBER On 1 March, Hang Seng Indexes Company announced the consultation conclusion on reforming the HSI. Critics, however, say the reform is tailored to Mainland Chinese issuers, dwarfs Hong Kong local issuers and demotes Hong Kong to a regional financial centre. Sensation aside, the HSI is the de-facto index representing the Hong Kong stock market. Hong Kong has been a bridge between issuers and global investors for more than two decades, providing top Mainland companies with access to offshore capital markets. Therefore, the domination of HSI constituents by Mainland issuers, regardless of the reform, is simply a reflection of how the Hong Kong stock market is structured. On the bright side, this serves as a good reminder of Hong Kong’s current position in the global financial market and where the city is heading. The massive number of quality Mainland issuers listed in Hong Kong have, and continue to draw the attention of investors worldwide. The strong performance of these issuers, coupled with the low economic growth and low interest rate environment in developed economies, left investors from all parts of the world who were previously not interested in Asian markets with no choice but to take a closer look at these Mainland issuers and the Hong Kong market as a whole. Quality companies in countries with low appeal to investors such as those countries traditionally classified as “emerging markets” could leverage the increased attention from global investors on the Hong Kong market and increase their exposure to global investors through Hong Kong. Though bankers, lawyers and accountants in Hong Kong have largely ignored potential opportunities from companies outside China within the last decade, it is never too late for us to promote the city’s capital market to other countries. The HSI is one of the most closely-monitored indices in the world. The increase in the number of constituents of the HSI will provide more of an incentive for Chinese as well as top non-Chinese companies in Asia to list in Hong Kong. Therefore, Hong Kong should make use of this opportunity and step up its efforts in bringing more diversity to its capital market. Doing so will enhance and maintain its position as a leading international financial centre. “ The increase in the number of constituents of the HSI will provide more of an incentive for Chinese as well as top non-Chinese companies in Asia to list in Hong Kong.” March 2021 15
16 March 2021
APLUS SETTING THE BAR In 1992, Len Jui was standing at the back of the room in Beijing watching the signing ceremony for a 20-year joint venture agreement between the Chinese government and the then Big Six auditing firms. “I was a young auditor with just three years’ experience, and I thought 20 years would be such a long time,” he remembers. Fast forward to 2012, and Jui was witnessing the dissolution of the joint venture. “I thought, ‘oh my God, I witnessed the first day and the last one.’ In between, I had moved around a lot and never thought I would be back there to witness the end. When I look back, it is part of history,” he says. Jui, who is currently Deputy Chair of the International Auditing and Assurance Standards Board (IAASB) and Head of Public Policy and Regulatory Affairs at KPMG China, started his career in 1989, working for Ernst & Young in Miami in the United States. He had been with the firm for three years, when he received a call from Arthur Andersen, asking if he would be interested in helping to set up its practice in Mainland China. Jui jumped at the chance. “It was a wonderful experience because basically everything was starting from scratch – 1992 was a turning point for China’s audit profession,” he remembers. He worked for Arthur Andersen for three years, during which time he assisted with seven initial public offerings (IPOs) on the Shanghai Stock Exchange and helped a number of multinational corporations get a foothold in China through investments and partnerships. In 1995, he received a call from a headhunter asking if he would be interested in joining a multinational telecoms company in the U.S. “In the late 1990s, telecoms and Internet infrastructure was a hot industry. There was deregulation of the global telecoms industry and I thought it would be interesting to enter it. I joined as a regional chief financial officer and later became CFO for the Asia Pacific region.” He stayed with the company for six years, during which time it did an IPO in the U.S., but by then, he had a young family and had been out of the U.S. for nearly As Deputy Chair of the International Auditing and Assurance Standards Board, Len Jui brings decades of experience to the standard setting process and in helping to expand the organization’s footprint in different countries. He tells Nicky Burridge about the impact the new Quality Management Standards will have on the profession, his international upbringing, and career in standards and regulation Photography by Stefen Chow March 2021 17
LEADERSHIP PROFILE Len Jui nine years and was ready to go back home. Though a number of different options were open to him, the one that most interested himwas taking up a post at the U.S. Securities and Exchange Commission (SEC) inWashington, D.C. as associate chief accountant in the Office of the Chief Accountant. “After working as a public accountant and for a public company, regulation and standard setting intrigued me. But it seemed like a black hole and you didn’t know exactly what the regulators were thinking or how they set the rules and regulations.” He adds that with two young children, the prospect of having a job that did not involve a lot of travel, enabling him to spend more time at home, also appealed. Looking back, he says it was the best career decision he ever made. Jui spent eight years at the SEC overseeing international accounting and auditing standards and international audit regulation. He was only a fewmonths into the job when Enron went bankrupt and the accounting scandal that was uncovered led to the dissolution of Arthur Andersen. “Following Enron and other corporate failures, the U.S. Congress passed a number of laws and regulations to promote greater corporate governance and more accountability for management, as well as the audit profession. I saw the timing as being good luck, rather than something bad, as it meant I was able to participate in a number of these regulatory and legislative changes,” Jui says. He adds that once these changes had been made in the U.S., regulators in other jurisdictions, including in Europe, the United Kingdom and Japan, started to look at bringing in similar rules. “I was able to work with a number of regulators around the world, representing the SEC, changing the way audits are done and bringing more accountability to the audit profession,” he says. In 2008, Jui was approached by KPMG to work in Beijing. “I decided it was a good move. I wanted to see how all the new rules and regulations had impacted the profession, so I joined KPMG and have been there ever since,” he says. Building consensus Jui became a member of the IAASB, which sets quality international standards for auditing assurance and quality control, in 2017 and was appointed as Deputy Chairman at the beginning of this year. He was first attracted to joining the IAASB by the prospect of helping to promote audit quality, a key driver of which is having high quality auditing standards. “I took on the role of Deputy Chair to promote the use of IAASB standards globally and engage stakeholders to promote the role of the audit profession.” He sees his role as having two main functions, namely building consensus and conducting outreach work. Jui credits his time at the SEC as being particularly helpful to him in his work for the IAASB. “When I was at the SEC, I worked with a number of regulators around the world, as well as professional bodies, including the Hong Kong Institute of CPAs, to gain the views of the international community in promoting audit quality and building consensus.” When setting standards, he points out that it is important not only to consider views from the profession, but to also think about the people and institutions that use audits and financial statements, particularly investors. “Having previously been a regulator, as well as having been in practice for the past 13 years – and as an investor myself – I bring a different view,” he says. “Most of the members of the IAASB have either been in the profession or been a regulator all of their lives, so they bring a specific perspective to the standard setting process. As Deputy Chair, I try to reconcile those different perspectives and understand where they are coming from. Being willing to listen to issues and understanding the perspectives of others are fundamental to the work to reconcile differences and find common ground to formulate high quality standards for global adoption.” He adds that as the IAASB is an international organization, it is particularly important that he is sensitive to regional and cultural differences, pointing out that regions such as Europe and Asia Pacific should not be treated as if they are one entity, as the countries within them have very different perspectives, for example, Japan has a very different culture to China, even though they are both in North Asia. Jui describes the second part of his role as being an ambassador for the IAASB and promoting international standards and their adoption, and conducting outreach work to encourage convergence. “I can’t travel due to COVID-19-related travel restrictions, but I still talk to a lot of different regulators. While I am promoting the standards, I listen to their needs and whether there are any challenges in implementing the standards in their country. The deputy chair has to be aware of what is going on around the world and make sure the standards are fit for purpose for different countries,” he says. “I took on the role of Deputy Chair to promote the use of IAASB standards globally and engage stakeholders to promote the role of the audit profession.” 18 March 2021
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