A comparative study of the taxation of business profits - especially 'online' profits - in Australia and the Hong Kong Special Administrative Region of the People's Republic of China
thesisposted on 13.01.2017, 03:03 by Wong, Antonietta Pui-Kwok
There are two main principles under which jurisdictions tax income – source and residence. The point of these two principles is to establish a ‘nexus’ or link between a taxable transaction, operation or activity and a taxing state. It is this nexus which is used to justify the imposition of taxation by the jurisdiction on a particular taxpayer. Where a taxpayer is a ‘resident’ of a jurisdiction, then that person often becomes liable to pay tax on income derived from all sources. Where a taxpayer is a ‘nonresident’ of a jurisdiction, then that person often becomes liable to pay tax on income derived from sources within a particular, relevant jurisdiction. The concept of source of income is fundamentally important to both Australia and Hong Kong. Australia adopts a worldwide tax system that taxes its residents on Australian and foreign income and non-residents on Australian income, whilst Hong Kong adopts a territorial tax system that forgoes taxing foreign income irrespective of who has derived it. The fundamental basis for taxation under a territorial tax system is the source of income; while the fundamental basis for taxation under a worldwide tax system is the concept of residence. In both jurisdictions, the decisions of the courts on the meaning of source have been crucial in defining the concept of ‘source of income’ for tax purposes. The foundations of source-based taxation are less stable today. There is no universal set of source rules that can readily be applied to every circumstance to determine the source or locality of profits. The growth in international trade, supported by the development of electronic commerce, has substantially increased source-related revenue risks. Entities are increasingly able to structure their finances and conduct their affairs without being constrained by geography or national boundaries. Anticipated profits may be shifted to a related party and from one jurisdiction to another to arrive at a reduced overall tax burden. It is becoming increasingly difficult to determine from what and where income originates. The thesis examines the nature of the current source rules in Australia and Hong Kong and analyses the fundamental adequacy of the source principle generally when confronted, especially, with the challenge of rapidly growing Internet-based commercial activities. Australia and Hong Kong have been chosen for comparative study for the following reasons: the two jurisdictions are good examples of small-medium advanced economies; they are similar in the sense that they are, primarily, knowledge capital-importing jurisdictions; their approaches to ‘source’ differ markedly; and these approaches tend towards each end of the ‘source spectrum’. The thesis identifies certain principal research questions. The basic responses to these questions are: The concept of source of income is, essentially, less clear today in the domestic tax law of Australia and Hong Kong than before. Determining the source of income in Australia and Hong Kong can be a very complex issue. The difficulty related to making such determinations is growing. Searching for the real source of income has become still more problematic with the increase in globalisation and the rapid growth of Internet-based commerce. The traditional concept of source of income has ‘lost traction’ as a fundamental basis for effectively imposing income taxation, especially, in today’s globalised economy. Existing source rules do not deal adequately with certain ‘revenue-leakage’ issues confronting us today and, even more, the likely issues of tomorrow. We need to reconsider how we can better address these issues. The thesis establishes that this is so for Australia and Hong Kong. It also reasons that this proposition generally holds true for most developed tax jurisdictions. The thesis concludes with a detailed review of three of the most prominent optional approaches for addressing the source challenge: (A) a move to a new refundable withholding-tax-based method of taxing cross-border electronic commerce; (B) a shift to far greater reliance on the use of the residence principle of taxation; and (C) a shift to notably greater reliance on (indirect) consumption taxation. Option C, it is argued, offers the best prospects for dealing in the least bad way with the identified issues.