RELATIONSHIP BETWEEN THE COMPREHENSIVE ARRANGEMENT AND THE ORDINANCE
The Comprehensive Arrangement has been implemented in
accordance with section 49 of the Ordinance and accordingly has legal effect. The Comprehensive Arrangement and the Ordinance (including subsidiary legislation) are interrelated and complement each other. For matters falling within its scope, the Comprehensive Arrangement performs the function of allocating the right to tax between the two Sides. When the right to tax has been allocated, both Sides will continue to refer to their respective domestic taxation legislation to resolve problems of tax administration and enforcement, such as in deciding whether certain income should be subject to tax, and in the
computation of assessable income and tax payable.
In handling problems arising from any inconsistency between the
Comprehensive Arrangement and the Ordinance, priority will be accorded to the Comprehensive Arrangement to ensure compliance with its provisions. Hong Kong adopts the “preferential treatment” principle, i.e. where the Comprehensive Arrangement and the Ordinance contain different provisions relating to the same matter, preference will be given to the provisions that are most beneficial to the taxpayers. For example, if a Mainland resident renders employment services in Hong Kong but does not meet the exemption conditions stipulated in Article 14 (e.g. his remuneration is paid by a Hong Kong employer), he will still be exempt from tax under the Ordinance if his visit to Hong Kong in the year of assessment concerned does not exceed a total
of 60 days.
The Comprehensive Arrangement should not affect existing
concessional practices in Hong Kong. Take for example the case of a Hong Kong manufacturer who concludes a contract processing arrangement with a Mainland entity. In accordance with paragraphs 13 to 19 of Departmental Interpretation and Practice Notes No. 21 (Revised 1998), 50% of his profits may be regarded as profits arising outside Hong Kong and not chargeable to profits tax in Hong Kong. This method of apportioning profits that arise both inside and outside Hong Kong on a 50:50 basis remains applicable. According to the provisions of the Comprehensive Arrangement, the Hong Kong manufacturer could be regarded as having a permanent establishment in
the Mainland and is therefore liable to tax there.
However, it is noted that it is