Taxation And Its Implication On Cross-Border Profits Of Manufacturing Businesses In Hong Kong

As Hong Kong manufacturers accelerate to shift their operations to China and cease or contract. Their operations in Hong Kong, many of them are taking advantage of the limitation of a source jurisdiction to team up with Chinese companies and escape the Hong Kong tax net. This relocation exercise of their manufacturing base not only allows the Hong Kong manufacturers to enjoy the preferential tax concessions for foreign investors and lower cost of production in mainland China, but also depletes the public coffers to the Hong Kong Government. We therefore postulate two hypotheses: (1) there is a negative association between the business operations in China and those in Hong Kong, and (2) there is a negative association between the business operations in China and the related Hong Kong profits tax liability. A questionnaire survey was carried out to collect data on the level of activities in both China and Hong Kong, in particular data from Hong Kong manufacturers on their Hong Kong profits tax liability. Spearman’s rank-order correlation analysis was used to test the hypotheses. The result supports that the higher the level of business operations in China, the lower the level of business operations in Hong Kong. It also reveals that the higher the level of business operations in China, the lower the related Hong Kong profits tax liability. The issue of tax base erosion is a case for Hong Kong to review its principle of taxing only profits locally generated.