Hong Kong: The Country With the Simplest Tax System in APAC 2

Only two countries from Asia-Pacific (APAC) figure in the bottom 10 of the 2017 Financial Complexity Index constructed by the Netherlands-based TMF Group. The index has been designed to study the complexity of accounting and tax compliance frameworks globally. The bottom 10 represents countries with the least complex systems.

The Group had selected 94 countries for the analysis, 20 of which were from APAC. Among the two which made the bottom 10 from the region were Hong Kong and Cambodia. Since the report only highlighted the former, we’ll take a closer look into this jurisdiction below along with its standing in the World Bank’s Doing Business report.

Hong Kong

Hong Kong is the fourth best place for doing business in the world and the second best in Asia. Singapore is the best place of doing business from APAC, ranking second in the world according to the Doing Business report.

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Though we’ve highlighted ‘paying taxes’ as the parameter in which the country has done the best – it ranks third in the world – there are other criteria in which it has the same ranking, including ‘protecting minority investors’ and ‘starting a business’ among others. Given the focus on tax systems, the aforementioned parameter was the most relevant, thus finding a place on the table above.

Better tax system

Though Hong Kong takes second place to Singapore as a place of doing business in APAC, it has the simpler of the two tax systems according to the Complexity Index. This is, in a limited way, corroborated by the Doing Business report as well, which ranks Singapore 8th in the world in ‘paying taxes’.

The country does not levy any sales or value-added tax. It asks for only three taxes – salary, corporate income, and property.

A feature highlighted by the report which makes the tax system in Hong Kong attractive is that taxes are levied on a territorial basis. This implies that if an entity has global operations, it has to pay taxes only on income from its Hong Kong offices. This feature is available to all entities and is not affected by the residential status of taxpayers.

There are a few regulatory requirements that entities need to adhere to though. The report cited the requirement of keeping accounting records for seven years. There is a provision of heavy fines for directors if bookkeeping requirements are not met.

However, this is not a big ask for doing business in one of the most important financial centers in APAC. This simple system also justifies the “One country, two systems” philosophy. While China is on the list among the 10 countries with the most complex tax systems, Hone Kong leads the region with the simplest system.

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