Issue 9 Volume 17 September 2021 DRIVING BUSINESS SUCCESS PLUS: PROFILE Frederik Gollob, Chair of the European Chamber of Commerce in Hong Kong THE JOURNEY TO NET-ZERO Companies committing to reducing greenhouse gas emissions SECOND OPINIONS What’s the best way to give valuable advice? A BRIGHT FUTURE Top students of the Institute’s PGY 3WCNKƂECVKQP 2TQITCOOG QP how they are becoming future-ready
PRESIDENT’S MESSAGE APLUS September 2021 1 The bill introducing the further regulatory reform of the accounting profession continues its legislative journey. This month, ahead of the 7 September meeting of the Bills Committee on Financial Reporting Council (Amendment) Bill 2021, the Institute’s submission on the bill was published on the committee’s webpage. The submission set out how these proposals will have a significant impact on the role and responsibilities of the Institute and result in major reorganization with potential operational and financial implications for the Institute. The response reiterates the views of members and students, as expressed through the survey regarding the regulatory reform, and reports 11 key issues to the Bills Committee that have been under consideration. It also proposed six amendments for the committee’s consideration. The outcome of the extraordinary general meeting on 30 September will play a part in the Council’s considerations for determining what further action should be taken. Members will be notified of the Council’s plans in due course. The Institute will also continue to communicate to members any important developments in the legislative process. We held a briefing in late September for the judges of the Best Corporate Governance and ESG Awards 2021. The awards were revamped this year to highlight the increasing expectations regarding environmental, social and governance (ESG) performances. I gave introductory remarks to the judging process to the judging panel, explaining what is expected from them and highlighting the new awards for the Most Sustainable Companies/Organizations. These awards aim to recognize those that have performed to a high standard in both corporate governance and ESG, and that are taking steps to integrate these two elements within their strategy and operations. I also emphasized the point that the awards are not about reporting, but about the underlying performances and practices. I’m looking forward to the Institute’s annual dinner which will take place on 12 November at JW Marriott Hotel Hong Kong. I hope you will join us at this event, in celebration of the accounting community and how we have weathered the recent disruption to our working lives. It truly will be an auspicious celebration of our profession, and a great chance to socialize. More details, including sponsorship opportunities, will be announced soon. Before we celebrate the annual dinner there are plenty more events for us to enjoy and learn at. The first event to look forward to is the 72nd National Day Celebration for the Accountancy Profession on 28 September. Jointly co-hosted by the Institute, the Institute of Chartered Accountants in England and Wales and the Chartered Institute of Management Accountants this year will bring together the accounting community to celebrate the profession, promote unity within it and create solidarity. The CPA Conference 2021 is also fast approaching. I look forward to meeting members at our first conference for both CPAs in business and practice on 2 October, which provides a platform for speakers to share and inspire Institute members on the latest trends and developments relating to the accounting profession and the business world. Join us there to hear from leading members of the business community and learn how to transform your organization, and yourself, for the digital future ahead. After this, the annual IT Conference will take place on 23 October as a virtual conference. The event will consider the new reality we are now in. The conference will bring together renowned speakers to discuss important topics including the modernization of finance in the new normal, virtual/ augmented reality technologies, innovative trends and best practices on the future of work. I do hope you will join one of these upcoming events. Raymond Cheng FCPA (practising) President Dear members, “I’m looking forward to the Institute’s annual dinner which will take place on 12 November at JW Marriott Hotel Hong Kong. I hope you will join us at this event, in celebration of the accounting community and how we have weathered the recent disruption to our working lives.”
CONTENTS Issue 9 Volume 17 September 2021 NEWS 01 President’s message 04 Institute news 06 Business news FEATURES 08 The tides are changing Experts discuss trends in today’s changing international tax landscape 14 Second opinions What’s the best way to give valuable advice? 16 Leadership: Frederik Gollob The Chair of the European Chamber of Commerce in Hong Kong on the chamber’s pivotal role in voicing the needs of the European business community 22 How to Matthew Li FCPA (practising), Cofounder of NOVA CPA Ltd., on the steps firms can take to go digital 23 Thought leadership: Ada Chung FCPA The Privacy Commissioner for Personal Data on how the new inspection regime will stamp out the unlawful use of personal data 24 The journey to net-zero What are companies doing to limit their carbon emissions for a net-zero future? 30 Accountant Plus: Raymond Tam CPA The Chief Financial Officer of Adagene Inc. on how his CPA skills help him to add value in the biotech industry 37 Meet the speaker What to expect from an e-Series course on limited partnership funds SOURCE 38 A chance to tailor a new standard A look at the IASB’s proposal for reduced disclosure requirements 40 A step forward for reporting BCUCC A summary of specific areas of the Institute’s response to the IASB discussion paper 24 The journey to net-zero 08 The tides are changing Panellists from this year’s Annual Taxation Conference on Hong Kong’s preparedness for BEPS 2.0
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 Junior Copy Editor Jeremy Chan Associate Editor Nicky Burridge Contributor Erin Hale, Jolene Otremba Registered Office 2/FWang Kee Building, 252 Hennessy Road, Wanchai, Hong Kong Advertising enquiries Advertising Director Derek Tsang Email: derektsang@mandl.asia ISSN 1815-3380 President Raymond Cheng Vice Presidents Rosalind Lee Ken Li Chief Executive and Registrar Margaret W. S. Chan Director of Corporate Communications Dr Wendy Lam Associate Director of Corporate Communications 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 41 Blockchain and accounting Part one of blockchain series: An overview of recent developments in the accounting and audit of cryptocurrencies 42 Technical news WORK-LIFE BALANCE 46 The brightest stars Top-scoring new QP students on the practical nature of the programme, and how it has prepared them for a fruitful career in the profession 52 Young member of the month Tayyeb Mohamed CPA, Senior Manager in International Tax and Transaction Services – Transfer Pricing at EY 54 Leisure Plus Spotlight on film and TV and what members are currently reading and listening to 56 Let’s get fiscal You’re still not famous enough to quit your accounting job, says Nury Vittachi 30 Engineering success Raymond Tam CPA, Chief Financial Officer of Adagene Inc., on how his CPA skills help him to look at business from different perspectives, and guide a cuttingedge clinical-stage biopharmaceutical company 54 16 Home away from home Leisure Plus 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 2021. Print run: 7,135 copies The digital version is distributed to all 46,713 members, 17,458 students of the Institute and 2,358 business stakeholders every month.
NEWS Institute news Business news 4 September 2021 Resolutions by agreement Shin Yick, Fabian CPA Complaint: Failure or neglect to observe, maintain or otherwise apply the fundamental principle of professional behaviour under sections 100.5(e) and 150 of the applicable Code of Ethics for Professional Accountants. Shinwas formerly a responsible officer and the chief executive officer of Yi Shun Da Capital Limited. In 2017, hewas the sponsor principal in charge of supervising the execution of a listing application for which the companywas the sole sponsor. The listing application lapsed subsequently after inquiries by the Securities and Futures Commission (SFC) and the Stock Exchange of Hong Kong. The SFC later instituted an investigation and found that the company failed to comply with relevant rules and regulations of the SFC. The SFC also found that the company’s failures were attributable to Shin’s failure to discharge his duties and Shin was in breach of the relevant rules and regulations of the SFC. In September 2020, the SFC issued a decision notice banning Shin from re-entering the industry for 20 months. The Institute’s IT Virtual Conference 2021 will take place on 23 October. Themed “Coming out from virtual reality to the new reality,” the conference will bring together renowned speakers and panellists to discuss Hong Kong’s first Technology Validation Platform, the modernization of finance in the new normal, virtual and augmented reality technologies, innovative trends and best practices in the future of work, as well as moving from compliance to business advisory. Visit the Institute’s website for more information. EGM on the further reform of the regulatory regime of the accounting profession In view of the government’s proposed reform of the regulatory regime of the accounting profession, the Council resolved to call an extraordinary general meeting (EGM) on 30 September. Members can visit the EGM webpage on the Institute’s website to access the Registrar’s official notice and the relevant documents. China Tax Course The China Tax Course, a compulsory component of the Institute’s Professional Diploma in China Tax, will start on 9 October. Speakers will cover foundation knowledge and the latest updates on China tax laws and regulations that is critical for analysing China taxation issues and coming up with sound tax planning solutions. The course can also be taken on a standalone basis. Those interested can register now via the Institute’s website. Annual Dinner 2021: Save the date The Institute’s annual dinner will take place on 12 November at the JW Marriott Hotel Hong Kong. Event details will be announced soon. IT Virtual Conference 2021: Technologies and transformation initiatives under “new reality”
APLUS Regulatory action: In lieu of further proceedings, the Council concluded the following should resolve the complaint: 1. Shin acknowledges the facts of the case and the areas of non-compliancewith professional standards; 2. Shin be reprimanded; and 3. Shin pays costs of the Institute of HK$15,000. Ng Man Fai, CPA (practising) Complaint: Failure or neglect to observe, maintain or otherwise apply the fundamental principle of professional competence and due care in sections 110.1 A1 (c) and R113.1 under Chapter A of the Code of Ethics for Professional Accountants. Ng issued an accountant’s report on a solicitors’ firm under the Accountant’s Report Rules (Cap. 159A) (ARR) for the year ended 31 December 2019. However, the procedures Ng performed in support of the report were deficient in that: (i) The clients’ ledger accounts of the firmwere not scrutinized for at least two dateswithin the year to ensure that no account was overdrawn; (ii) Ng failed to identify that certain cheque payments out of client accounts, whichwere checked in his sampling test, were notmade to the solicitor but to third parties in violation of the Solicitors’ Accounts Rules; (iii)Circularization of client ledger accountswas not performed; and (iv)Nowritten confirmationwas obtained fromthe firm that regular back-up procedureswere carried out for its computerized accounting system. As a result, Ng failed to conduct the reporting engagement in accordancewith the ARR and the Institute’s Practice Note 840 (Revised) Reporting onSolicitors’ Accounts under the Solicitors’ Accounts Rules and theAccountant’s Report Rules. Regulatory action: In lieu of further proceedings, the Council concluded the following should resolve the complaint: 1. Ng acknowledges the facts of the case and the areas of non-compliancewith professional standards; 2. Ng be reprimanded; and 3. Ng pays an administrative penalty of HK$50,000 and costs of the Institute of HK$15,000. Disciplinary finding KPMG, Yu Yuk Ping, June CPA and Yu Wai Sum CPA (practising) Complaint: (i) Failure or neglect by KPMG and Yu Yuk Ping, June to observe, maintain or otherwise apply Hong Kong Standard on Auditing (HKSA) 200 Objective andGeneral PrinciplesGoverning anAudit of Financial Statements, HKSA 230 Audit Documentation, HKSA 240 TheAuditor’s Responsibilities toConsider Fraud in anAudit of Financial Statements, HKSA 500 Audit Evidence, HKSA 505 External Confirmations, HKSA 520 Analytical Procedures, andHKSA 530 Audit Sampling andOtherMeans of Testing; (ii) Failure or neglect by KPMG and YuWai Sumto observe, maintain or otherwise apply HKSA 500 Audit Evidence, HKSA 505 External Confirmations, andHKSA 530 Audit Sampling and OtherMeans of Testing. KPMGwas the reporting accountant for the Hong Kong initial public offering (IPO) of China Forestry Holdings Co., Ltd. in 2009, and in that capacity, audited the financial information of the company and its subsidiaries (collectively, group) for the years ended 31 December 2006, 2007, 2008 and the sixmonths ended 30 June 2009 (IPO engagement). After the listing, KPMG audited the group’s financial statements for the year ended 31 December 2009 (2009 audit). Unmodified opinionswere expressed in the accountant’s report of the IPO engagement and the auditor’s report of the 2009 audit. Yu Yuk Ping, June and YuWai Sum were the engagement partners for the IPO engagement and the 2009 audit respectively. The group was engaged in purchasing and planting forests, managing and harvesting forests, and selling harvested logs. It owned plantation assets in certain provinces of the People’s Republic of China. The Institute received a referral from the Financial Reporting Council (FRC) about audit irregularities in the IPO engagement and the 2009 audit, alleging that the audit teamdid not exercise sufficient professional scepticism in conducting audit procedures in a number of areas. As a result, there were deficiencies in the evidence obtained and documentation compiled in the IPO engagement in respect of the reliability of logging permits, existence of certain customers, completeness of sales, occurrence and completeness of expenses for logging activities, existence and ownership of the plantation assets, and effectiveness of the group’s controls over cash and cash equivalents. For the 2009 audit, deficiencies were found in the evidence obtained on the completeness of sales, and existence and ownership of the plantation assets. Decisions and reasons: The Disciplinary Committee reprimanded the respondents. In addition, KPMG, Yu Yuk Ping, June and Yu Wai Sumwere ordered to pay penalties of HK$500,000, HK$300,000 and HK$200,000 respectively, and to pay costs of the Institute and FRC totalling HK$5,000,000. When making its decision, the committee considered the breaches were not intentional, reckless or for improper motive. They noted that the sanctions should be proportionate to the nature of the failure, with the aim to protect public interest. The committee also noted KPMG’s disciplinary history and the other respondents’ clear disciplinary records, and that the cost of HK$5 million, as agreed by all the parties, was reasonable in light of the scale of the investigation and the amount of documents involved. Details of the resolutions by agreement and disciplinary finding are available on the Institute’swebsite. September 2021 5
NEWS Business KPMG in the United Kingdomwants almost a third of its U.K. partners and staff to come fromworking class backgrounds by 2030, the company announced on 9 September. The move, a first for a large business in the U.K., came after a KPMG survey found that only a fifth of the firm’s partners and employees are fromworking class backgrounds, and are paid 8.6 percent less than those whose parents are in “higher, managerial, administrative and professional” jobs. KPMG has defined working class as having parents with “routine and manual” jobs such as drivers, cleaners and farmworkers. The firm said it will conduct new recruitment initiatives to attract talent from lower socioeconomic backgrounds for middle management and senior roles in order to reach its target. MONTREAL EXCHANGE TO EXTEND HOURS TO TAP INTO ASIAN MARKET DELOITTE TOPS US$50 BILLION IN REVENUES FOR FIRST TIME CATHAY PACIFIC LOWERS FLIGHTS EXPECTATIONS FOR REST OF YEAR Hong Kong’s unemployment rate dropped to 4.7 percent, the lowest level since the COVID-19 pandemic began, for the three month period ending August, according to data released by the Census and Statistics Department on 16 September. The rate was 0.3 percentage points down from theMay to July period and is the lowest since early 2020, when it reached 4.2 percent for the January toMarch period. Though the economy looks to further recover with help from the Consumption Voucher Scheme, the lack of widespread vaccination and closed borders with the Mainland will continue to stymie recovery, according to Simon Lee CPA, Co-director of the International Business and Chinese Enterprise Programme at Chinese University of Hong Kong. “The city’s economic recovery will not be in full swing until the government has fully opened up the borders, especially with Mainland China,” Lee told the South ChinaMorning Post. Deloitte’s global revenue for its 2021 financial year grew 5.5 percent to reach US$50.2 billion, making it the first Big Four firm to surpass the US$50 billion mark. Deloitte’s advisory business was the most profitable as a result of distressed or COVID-19-related engagements, bringing in more than US$20 billion and outshining its audit and assurance division, which drew in US$10.5 billion and its tax and legal department, which made US$8.9 billion. “While the past year was difficult and defined by uncertainty, it has shown what can be achieved at speed and scale when businesses, governments, and society work together to tackle tough global challenges,” said Punit Renjen, Global Chief Executive Officer of Deloitte. TheMontreal Exchange, Canada’s derivatives exchange, has extended its trading day by four hours to include working hours of Hong Kong and other Asian cities. The extension, which came into effect on 20 September, now allows local investors in the Asia-Pacific region to trade Canadian derivatives. The bourse will trade 20.5 hours a day, from 7:30 a.m. Hong Kong time to 4:00 a.m. the following day. The move comes three years after theMontreal Exchange increased its trading time, also by four hours, to encompass the opening of the London market, which attracted more investors fromEurope. “The extension of trading hours is part of Montreal Exchange’s globalization strategy, as we continue to push the evolution of our markets and address the increasing global demand for Canadian derivatives,” said Luc Fortin, Chief Executive Officer of theMontreal Exchange. KPMG U.K. TO RECRUIT MORE STAFF FROM WORKING CLASS BACKGROUNDS Cathay Pacific, Hong Kong’s embattled carrier, has reduced its expectations for the number of flights it will fly before the end of the year. In a stock exchange filing on 20 September, the airline said it expects to only fly 13 percent of its flight schedule seen in 2019, down from the 30 percent it had previously indicated. The COVID-19 pandemic and related travel restrictions continue to deal fresh blows to Cathay Pacific’s business, which has seen the airline pile up losses of HK$29.2 billion, with a HK$7.57 billion deficit in the first half of the year. Despite vowing to keep its expenses belowHK$1 billion a month for the remainder of the year, closed borders and tightened local quarantine arrangements continue to deter passengers from flying, with the carrier flying just over 4,300 customers a day on average in August, a figure 95 percent lower than the same period last year. HONG KONG UNEMPLOYMENT FALLS TO NEW LOW SINCE START OF PANDEMIC 6 September 2021
U.K.-based insurance giant Prudential Plc plans to raise about US$2.4 billion from a share placement in Hong Kong, as the company seeks to capture long-term growth opportunities in both Asia and Africa brought on by global economic recovery amid COVID-19 vaccinations. The company will offer 130.8 million shares on the HKEX at an offer price of no more than HK$172 per share, according to a statement it released this month. The statement added that 6.5 million shares will be offered to local investors and that up to 32.7 million shares will be provided, depending on demand. The shares are expected to start trading on 4 October. Rishi Sunak, Chancellor of the Exchequer, has ordered two immediate reviews of financial regulation in the U.K. related to Greensill Capital, the supply chain finance company that collapsed in March, wrote the Financial Times on 24 September. Sunak has also accepted recommendations put forth in July by a committee of members of parliament for the reform of the “appointed representative regime,” a mechanism used by Greensill to remain undetected by Britain’s regulators while the company was based in the U.K. and had arranged billion of pounds in financing a year. According to the FT, Sunak had already commissioned the U.K. treasury to review the regime, including legislative reforms to increase the oversight of appointed representatives to prevent opportunities of abuse. PRUDENTIAL TO RAISE NOODLE CHAIN TAMJAI LAUNCHES HONG KONG IPO The so-called southbound leg of the Bond Connect launched on 24 September, enabling investors in Mainland China to buy and sell offshore debt through Hong Kong. More than US$618 million worth of transactions were made on the first day of trading by 11 lenders, including HSBC and Bank of China (Hong Kong). The southbound leg of the Bond Connect, which follows the launch of the Wealth Management Connect on 10 September, is expected to enhance the city’s role as China’s financial gateway to the world. The northbound leg of the Bond Connect was introduced in 2017 and enabled institutional investors to trade in the Mainland bond market. More than 2,700 institutional investors have used the northbound link to tap into China’s US$17.5 trillion bond market since, according to the South China Morning Post. SOUTHBOUND BOND CONNECT LAUNCHES APLUS Special purpose acquisition companies (SPACs) in Hong Kong must raise at least HK$1 billion to list on the main board, according to proposed rule changes announced by the Hong Kong Stock Exchange (HKEX) on 17 September. The consultation paper also proposes banning retail investors from buying SPACs, which are blank-cheque companies that do not have any existing businesses but are created to purchase assets and raise cash reserves. This would make the city the latest major Asian market, after Singapore, to allow SPACs to go public if the HKEX’s propositions advance. “We do not believe SPACs will replace the traditional way of listing. In the United States, there have been a lot of SPAC listings, but there are still a lot of companies listing in the traditional channel,” said Bonnie Chan, Head of Listing at HKEX. TamJai International, a Hong Kong restaurant operator that owns the popular TamJai SamGor noodle chain, has launched a HK$1.4 billion initial public offering. The company will offer 335 million shares, which will range from HK$3.33 to HK$4.17 in price and begin trading on 7 October. The company, which owns 156 restaurants mainly in Hong Kong, will use the proceeds to refurbish restaurants and expand central kitchen systems, and to expand its network across the city, Mainland China, Singapore and tap into new markets such as Australia and Japan. The restaurant, which specializes in rice noodles served in sour and spicy broths, reported HK$1.79 billion in revenue for the year ending March, up from HK$1.69 billion the previous year. HKEX PROPOSES NEW SPAC REQUIREMENTS U.K. TO TIGHTEN FINANCIAL REGULATIONS AFTER GREENSILL COLLAPSE US$2.4 BILLION IN HONG KONG SHARE OFFERING September 2021 7
ROUNDTABLE Hong Kong tax THE TIDES ARE Photography by Derek Lo SPEAKERS: (from left) MICHAEL OLESNICKY Senior Consultant, Tax, Baker McKenzie JO-AN YEE FCPA International Corporate Tax Advisory - Hong Kong Leader, EY and a member of the Institute’s Taxation Faculty Executive Committee (TFEC) EUGENE YEUNG CPA Partner, Corporate Tax Advisory, KPMG China, and a TFECmember WILLIAMCHAN CPA Partner, Grant Thornton Tax Services, and Chair of the TFEC SARAH CHAN FCPA Partner, Tax and Business Advisory Services, Deloitte China, and Deputy Chair of the TFEC BENJAMIN CHAN CPA Acting Deputy Commissioner (Technical), Inland Revenue Department GWENDA HO CPA Partner, Tax Services, PwC Hong Kong, and a TFEC member With the detailed implementation plan of BEPS 2.0 expected to be agreed upon next month, Hong Kong once again finds itself needing to take a hard look at its long-term positioning and competitiveness amid the changing international tax landscape. Panellists at this year’s Annual Taxation Conference discussed Hong Kong’s readiness to face BEPS 2.0, the city’s approach to digitalization of tax governance and how it should foster itself into a successful international intellectual property hub. Jolene Otremba reports. 8 September 2021
APLUS CHANGING September 2021 9
ROUNDTABLE Hong Kong tax This year, more than 130 jurisdictions took the bold step to agree on a twopillar solution promulgated by the Organization for Economic Cooperation and Development (OECD) to tackle risks of base erosion and profit shifting (BEPS) arising from digitalization of economy. BEPS 2.0 aims to reform international taxation rules to ensure multinational enterprises (MNEs) pay a “fair share of tax” regardless of where they operate and how they structure their operations. BEPS 2.0 is a two-pillar solution. Pillar One would re-allocate taxing rights over MNEs to market jurisdictions where the MNEs have businesses and earn profits, regardless of whether they have a physical presence in the market jurisdiction. Pillar Two seeks to put a floor on competition over corporate income tax by introducing a global minimum tax rate that jurisdictions can use to protect their tax bases. Panellists at this year’s Annual Taxation Conference held by the Hong Kong Institute of CPAs in July agreed that the initiative was important for the stabilization of the international tax system. However, they argued that there were still many ambiguities surrounding how it will be rolled out, how it will achieve its purposes, and how the rules will affect Hong Kong and global businesses. This was one of the three topics covered by the panel. With insightful views on the future, they hosted a lively discussion based on the theme of “Trends and challenges in the changing international tax landscape.” New global tax rules To kick start the event, Sarah Chan FCPA, Partner of Tax and Business Advisory Services at Deloitte China, and Deputy Chair of the Institute’s Taxation Faculty Executive Committee (TFEC), asked the panellists whether they thought there was more clarity around Pillar One than the proposal discussed a year ago. According to Jo-An Yee FCPA, International Corporate Tax Advisory - Hong Kong Leader, Asia-Pacific Technology Tax Leader at EY, and a member of the TFEC, the criteria for determining whether an entity would be in-scope under Pillar One has been simplified since last year’s discussion and is now very much focused on turnover and profitability. However, she feels that it has also moved away from its original objective. “Pillar One was purely trying to target digital businesses, which didn’t necessarily have a physical presence in jurisdictions where they operate, and it tried to introduce new nexus and revenue-sourcing rules so some taxes could be allocated to their consumer markets,” she said. However, now Pillar One has been extended to all sectors with only a few exclusions, which moves away from the original purpose and could cause some confusion. There has been a change to the blueprint, Sarah Chan agreed, although some sectors, such as regulated financial services and extractives, have been carved out of the latest version. Echoing these sentiments was Michael Olesnicky, Senior Consultant in Tax at Baker McKenzie, and Non-official Member on the Hong Kong government’s Advisory Panel on BEPS 2.0. He explained that under the initial proposals, the idea was that all MNEs in certain sectors, such as automated digital services with a global revenue of more than 750 million euros, would have been caught by Pillar One. This would have covered around 4,000 MNEs. But now, with the new threshold being raised to over 20 billion euros, less than 100 MNEs (78 on one estimate) will be affected, albeit in a wider range of industries. The aim is to reduce this threshold to 10 billion euros after seven years. As jurisdictions continue to hash out the details, Olesnicky believes that there could still be a way to go before there will be much clarity on the rules and their application. The discussion then quickly turned to Hong Kong and whether the adoption of these pillars is actually worthwhile. Olesnicky argued that, under Pillar One, affected MNEs won’t be paying more taxes but there will be a reallocation of the jurisdictions in which they will be paying taxes. More taxes will be paid in overseas jurisdictions, but these taxes should be creditable in their home jurisdictions. So, given the relatively small size of Hong Kong’s market, he asked, “Is it really worth enacting 10 September 2021
APLUS “There are many types of businesses and the nature of their operations are very different. How to determine the source of their revenue is a great challenge.” legislation to apply Pillar One as there would be a lot of additional work and compliance? And, given Hong Kong’s small size, I wonder if the revenue gain for us makes it worthwhile.” Benjamin Chan CPA, currently Acting Deputy Commissioner (Technical) of the Inland Revenue Department (IRD), said that the government has been actively participating in the discussion of the rules under the OECD platform. While Pillar One might enable Hong Kong, as a market jurisdiction, to derive additional revenue from MNEs without physical presence in Hong Kong, for those with physical presence that have already been subject to tax here, the tax increase could be marginal. “There are many types of businesses and the nature of their operations are very different. How to determine the source of their revenue is a great challenge. This uncertainty poses challenges for the government to assess the impact of Pillar One on Hong Kong.” Opportunities remain for supporting tax policies Turning to Pillar Two, Sarah Chan said that there are concerns that Hong Kong will lose out in terms of taxing rights and revenue if the city does nothing, particularly given Hong Kong’s territorial tax system and its concessionary tax rates for areas specified sectors. So, she asked the panellists what their views were regarding the implementation of the global antibase erosion (GloBE) rules under Pillar Two. Eugene Yeung CPA, Partner of Corporate Tax Advisory at KPMG China, Convenor of the Taxation Faculty Budget Proposals 2022/2023 Sub-committee, and a member of the TFEC, doubted whether there will be a loss of revenue. He said that Pillar Two could essentially result in a top-up tax on revenue that Hong Kong has not previously received before. In this regard, if MNEs would otherwise have to pay additional taxes to their headquarters’ jurisdiction, “why shouldn’t Hong Kong take a part of that!” Again, reiterating the fact that these BEPS 2.0 measures are really targeting large MNEs, he said that tax incentives under Hong Kong’s preferential tax regimes would still benefit smaller businesses even under any new rules. Sharing Yeung’s views was Gwenda Ho CPA, Partner of Tax Services at PwC Hong Kong, and a member of the TFEC. She suggested if Hong Kong didn’t take actions in response to Pillar Two, it would be losing its taxing rights to other jurisdictions. A key consideration should be on howHong Kong can implement the new rules in a way that would minimize the compliance burden on the affected taxpayers, as well as any impact on small- and medium-sized businesses. “The challenging task is for the government to carefully balance the different considerations, such as keeping Hong Kong’s simple tax system; and secondly, using non-tax measures to maintain and enhance the competitiveness of Hong Kong. That will be critical,” she said. Hong Kong’s preparedness Even though the panellists were sceptical about BEPS 2.0’s timetable for implementation, they agreed that Hong Kong needs to be prepared. Benjamin Chan said: “The OECD has set a very ambitious timeline for all jurisdictions to bring Pillar Two into law by 2022, and to make it effective by 2023. But the IRD understands from its discussions that this timetable may be adapted September 2021 11
ROUNDTABLE Hong Kong tax “The consideration for MNEs in particular using Hong Kong as an IP location is that we have all the right business factors.” according to developments.” Regardless, the Hong Kong government is catering for all eventualities by planning and preparing ahead. The government is already engaging with a wide range of stakeholders on the response measures that may have to be adopted, and gauging their views on the potential impact. It has also been conveying views to the OECD. Once the government gets a clearer picture, it can then convey the right messages to practitioners and taxpayers on howHong Kong will respond, Benjamin Chan said. Sarah Chan suggested that some people may be confused by the many recent changes in the international tax landscape, and their interrelationships and impact on Hong Kong. She asked panellists’ view on this. Olesnicky responded by saying that the changes are all part of a continuum aimed at ensuring consistency in how jurisdictions treat certain kinds of income and trying to tackle what is seen as harmful tax competition between jurisdictions, as well as preventing abuses. He added that it would be a mistake to see BEPS 2.0 as the end of the process. In future, the OECD may look at other proposals for tax reform, such as the gig economy and about tax authorities assisting one another with enforcement and tax collection. The speakers agreed that these developments are not necessarily a bad thing for Hong Kong. In fact, Yee said that Pillar Two, for example, really gives “Hong Kong a bit of a kick because it’s time for us to up our game.” “We have been so reliant on the fact that we have a simple and low tax system…but now this is the opportune time for Hong Kong to say that we are a key digital hub, we are a financial centre, a logistics hub. It gives an opportunity for Hong Kong to focus more on the non-tax factors,” she said. Going digital Moving on, the panellists then turned their discussion to the digitization of tax governance and its relevant transformation. Sarah Chan asked the panellists to share their observations about the latest developments in the automation of tax compliance processes. Yeung started by explaining that the tax compliance environment has transformed, and automation has become part of the process. However, he contends that some jobs can never be replaced by robots. “We, as professional accountants, bring value to the table by making judgement calls,” he said. “We need human brains to do that and leave the routine functions to technology.” Ho agreed and said that when it comes to the younger generation of accountants, they want their jobs to be fun and don’t want to sit around just doing mundane work such as filling out tax returns. “So, the use of robotics to help with the more boring tasks is a good development,” she said. Ho also said that companies with global operations need to be able to access and compile information quickly. They can use technology to get a better picture of what’s happening everywhere. “Having a dashboard so that a tax director sitting here in Hong Kong knows real-time what’s happening all over the world. I think that’s very important,” she said. On that note, Sarah Chan took the opportunity to ask Benjamin Chan about Hong Kong’s proposed e-filing system of tax returns, and the objective of recentlyintroduced legislative provisions imposing penalties on service providers. Benjamin Chan explained that, under the new provisions, taxpayers will be allowed to engage service providers to furnish tax returns on their behalf. This will be entirely optional. In the past, taxpayers had to furnish tax returns on their own, so this added option will bring convenience to taxpayers. However, the option also means that a service provider will be allowed to carry out taxpayers’ obligations under the Inland Revenue Ordinance, and it is thus necessary for sanctions to be put in place to ensure compliance of the statutory requirements and to protect the interests of taxpayers. This is ultimately why the penalty provisions were added. He went on to clarify that only certain kinds of wrongdoings would be caught under the new penal provisions. For example, a service provider fails to furnish a tax return in accordance with the information provided by the taxpayer and the return is materially incorrect, or a service provider fails to file a tax return though it is engaged to do so by the taxpayer. However, “such wrongdoings should not be common,” he said. At the same time, the service provider will not be required to verify the correctness of the information provided by the taxpayer. Sarah Chan then asked the panellists to share their views on 12 September 2021
APLUS what they thought tax governance and tax compliance would look like in the next five years. For Yee, she predicts that the future is not about automation making tax easier, but about identifying tax risk. “With everything that is happening, that is quite important.” She believes that there will be a greater move towards the taxpayer and tax authorities having a more cohesive and transparent relationship. Other jurisdictions were looking at cooperative compliance, which could involve tax authorities having more access to data and controls. Yeung pointed out the increasing importance of technical and ethical judgement calls on the part of tax representatives. Olesnicky added that, in the past, the role of representatives was more about minimizing effective tax rates and the technical application of rules; whereas, nowadays, the emphasis was on paying a fair amount of tax, ensuring proper compliance, avoiding penalties and protecting against reputational risk. Yeung, Olesnicky and Benjamin Chan also touched on the issue of technology and big data as being part of the future. From robots and technology doing routine work, to how tax authorities are going to handle the vast amount of information currently being automatically exchanged between jurisdictions, one thing they could all agree on is that the future is going to be digital. Hong Kong as an intellectual property hub Considering these various developments, Sarah Chan asked the panellists what they thought it would take for Hong Kong to become a global intellectual property (IP) hub of the future. Ho said that companies generally have no problem with paying reasonable taxation but they also need to be able to claim appropriate deductions for expenditure incurred in earning income. She advocated implementing a unilateral tax credit and said that such would be crucial for Hong Kong to deal with double taxation since the city still needs to work on expanding its treaty network. Olesnicky added that he would like to see tax concessions being expanded to exploitation income where research and development is done in Hong Kong and is then commercialized. “Hong Kong did a lot of work to give enhanced tax deductions for IP, but where we shot ourselves in the foot is that once you develop the IP, you have to exploit it. The problem is that it is an incomplete exemption,” he said. Yee is enthusiastic about using Hong Kong as an IP location, and her experience supports this development. “I’ve done multiple very large migration projects and the consideration for MNEs in particular using Hong Kong as an IP location is that we have all the right business factors,” she said, citing Hong Kong’s strong IP protection laws, talented IP lawyers, and valuation companies that actually understand IP, as just a few factors. However, Hong Kong’s biggest shortcoming, according to her, is interpretation around IRD’s Departmental Interpretation and Practice Note 22 Taxation of Royalties and Other Income from Intellectual Properties. “Putting aside any geopolitical tensions, tax is the other question mark,” she said. Another area that Hong Kong could benefit from is stronger talent attraction and development. Yeung said that he hopes that the government can do more to attract talent to station in Hong Kong. Recognizing that COVID19 has now developed a work culture where certain roles can be performed from overseas, attracting talent to come and to stay in Hong Kong and recognizing their efforts in the process is important, he said. Benjamin Chan said that the government has to consider a few things. Firstly, the city needs to assess what economic benefits can be brought by introducing either tax or non-tax measures in relation to IP. Secondly, it needs to consider whether any measures introduced can withstand a review of harmful tax practices by the OECD and the European Union (EU). Not to mention the potential impact of the BEPS 2.0 initiative should also be evaluated. He stressed that: “We should never introduce measures of which the benefits can be easily counteracted by the GloBE rules.” However, he also said that there is always room for the city to improve its tax regime for the purposes of facilitating businesses and formulating tax policies in relation to IP. A new tax regime? Finally, the panellists were asked whether they thought Hong Kong, having a territorial tax system, ought to revamp the system given the new landscape. Olesnicky noted that Hong Kong would not be compelled to change its tax system due to Pillars One and Two. However, he was also concerned about the EU review of Hong Kong’s foreign source income exemption regime, the outcome of which could be negative. Also the OECD defined the tax base for Pillar Two purposes as including offshore income and capital gains. Benjamin Chan noted that while Hong Kong is not mandated to change its tax system under BEPS 2.0, if other jurisdictions adopted the rules, Hong Kong could end up ceding its taxing rights if it did nothing. Overall, the panellists agreed that adjustments and consultations would be par for the course, whether in response to BEPS 2.0, or the upcoming EU reviews, or simply responding to a new remote work culture. “We need to start thinking out of the box. We need to accept that the world is changing rapidly, and business models are very different from 20 to 30 years ago,” Ho said. “Whether the traditional way of viewing substance or viewing permanent establishment should still be applicable in the new economy, well, I think this is a question for tax authorities to think about. Maybe this could be a BEPS 3.0 question.” A recording of the Annual Taxation Conference is available on the Institute’s website. September 2021 13
SECOND OPINIONS: WHAT’S THE BEST WAY TO GIVE VALUABLE ADVICE? SECOND OPINIONS Management skills 14 September 2021 PAUL SHE CPA (PRACTISING), PRACTISING DIRECTOR, MAZARS HONG KONG, AND CHAIRMAN OF THE INSTITUTE’S QUALIFICATION AND EXAMINATIONS BOARD Anyone can give advice. But just because someone spouts their opinion, doesn’t mean it’s the best advice for you. Say your colleague is experiencing a stomach ache and you tell him/her to take antacid tablets. Though it may seem like a quick fix, it might not address the root cause of the problem. Therefore, it’s not easy to give correct advice. It’s even more challenging for us to give professional advice as a professional accountant. I believe that seeking and giving advice is central to effective leadership and decision-making. Yet, managers seldom view them as practical skills they can learn and improve. Here are steps to take when providing valuable advice. Firstly, start by gathering necessary information about the issues through questioning and listening. Use follow-up questions to deeply understand and identify the root cause and unique features of the issues. Avoid information overload, which can create a loss of focus. Try not to conclude a matter primarily based on the prima facie characteristics nor presume the root cause of certain similar issues would be the same. Going back to the example above, a stomach ache may not always be caused by too much acid inside of the stomach. Secondly, remember that good communication is done by keeping the intended beneficiary in mind. Critically analyse the information gathered and formulate the tactics with your professional knowledge and experience. This process involves identifying key objectives, developing an appropriate overall strategy, prioritizing executable action plans, and, more importantly, integrating various advice into solutions to meet the expectations of the recipient. Finally, one size does not fit all. Consider, select and adopt the most effective manner of communicating your proposed solutions by taking into account the personality of the recipient. Effective communication is best done with a caring, attentive and personal touch; some people may prefer to receive a proposed solution over coffee. The above skill sets can be developed and strengthened throughout one’s professional journey. The Institute’s new Qualification Programme (QP), in particular the integrated Capstone workshop, puts a strong emphasis on developing and accessing higher-order enabling skills, such as problem identification and solving, critical and lateral thinking, and effective communication skills to equip the next generation with the ability to formulate and provide professional solutions. “ Consider, select and adopt the most effective manner of communicating your proposed solutions by taking into account the personality of the recipient.”
APLUS Imagine someone gives you a bottle of 1985 Sassicaia red wine. You look it up on the Internet and find out that it is worth HK$25,000. But, you don’t drink wine. Would this gift be valuable to you? Giving advice is similar to selecting a gift – the receiver needs to treasure and appreciate it. Having been an executive coach and a consultant for years, giving advice is such a big part of my career. I always follow the T.H.I.N.K. model when formulating my advice, which helps to build up trust with people. T – is my advice true? We are living in a post-modern world. Truth can be subjective, depending on context. Giving truthful advice goes beyond our own experience and has to keep up with wider change. The advisor, therefore, needs to be an avid learner, who is curious about both societal and industry developments. H – is my advice helpful? Remember, giving advice is not about demonstrating your experience or knowledge. Giving helpful advice requires mental flexibility to appreciate how the receiver sees the world, and then provide relevant recommendations that are aligned with his or her values, and helpful to resolve the challenges or issues they are facing. I – is my advice inspiring? In my early days as a consultant, I tended to give quick advice, believing I knew better than my clients. A lot of the time, people want a new perspective on approaching an issue, not a solution. This requires deep listening to understand what’s being said (and also what’s not said). This helps the advisor gain insights on the person’s perspective and goal, and for blind spots to be identified to help the person approach or solve the problem. N – is my advice necessary? Advice is a bit like money. The more you print, the less valuable it becomes. I always assess how much advice my client can take at that specific moment. The “Adaptive Leadership” model, a leadership model that was introduced by Harvard Kennedy School professors Ronald Heifetz and Marty Linsky, states that you should give people change at a rate that they can accept – and this also holds true for giving advice. When giving advice, ask yourself if the audience is ready. If not, you can always save that for a more appropriate time. K – is my advice kind? This calls for examining the intention of our advice, whether it is given with empathy and kindness to help the person or the organization to become better. Advice could satisfy all the above five dimensions, but if it is not given with the best intention, it is still not going to be valued by the receiver. CATHERINE WONG, CHIEF DEVELOPMENT OFFICER, CHOREV CONSULTING INTERNATIONAL LTD. “ Giving truthful advice goes beyond our own experience and has to keep up with wider change. The advisor, therefore, needs to be an avid learner.” September 2021 15 MICHAEL TEH CPA, HEAD OF FINANCE, ALGORAND FOUNDATION Learning how to correctly provide both positive and negative feedback in work and in life is important. Positive feedback shows appreciation, reinforces good behaviour and boosts confidence. Negative feedback helps to correct undesirable performance, creates opportunity for improvement and if given properly, can show that you care about someone’s improvement and development. When providing feedback, I focus most on 1) timing; 2) communication; and 3) way of delivery. Timing. Providing feedback in a timely manner is important for both the one receiving it and the one providing it. On the receiving side, timely feedback can allow the individual to relate back to recent incidents and better reinforce the message. On the giving side, timely positive feedback can mean a timely return of a motivated individual. Even if you have to give negative feedback, providing it in a timely manner can prevent the reviewer in prolonging a negative impression towards an individual. But “timely” does not mean “instantly.” Rather than giving feedback right on the spot, which can be too informal, set up a meeting. This shows respect and provides an opportunity for a two-way conversation. Communication. Providing feedback is a form of communication, which is supposed to be two-way, otherwise you are informing or instructing. It is always worthwhile to begin the conversation by listening. Provide an opportunity for the person to express what they have been going through lately. That individual might already be able to concisely talk about their own shortfalls before you highlight them, or indicate they are going through a tough time in life. The individual could also be underperforming due to a lack of clear instruction or limited visibility on the company’s goal and vision. Therefore, by listening first, you are able to provide better feedback. Way of delivery. While delivering positive feedback is usually straightforward, providing negative feedback is an art. I adopt a mixed strategy between a “sandwich” approach and “direct transparent” approach, depending on the scenario. A “sandwich” approach is sandwiching negative feedback between a positive opening and ending. This opens up the recipients’ defense mechanism and enables them to be more receptive. Compliment their good work, add suggestions for improvement in the middle, and end it with some compliments and encouragement for continuous effort. However, this can sometimes lessen the importance of an urgent corrective action required from them. In cases where the individual is not delivering their duties and responsibilities up to their level, I would adopt a “direct transparent” approach. Make it clear and direct to them and make sure that they get the message. “ Begin the conversation by listening. Provide an opportunity for the person to express what they have been going through lately.”
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