- China starts taxing income earned by citizens working abroad
- It’s another blow for Hong Kong’s status as a financial hub
Fears of a Hong Kong brain drain are increasing after China moved to tax its citizens’ global income, undermining the financial hub’s appeal to thousands of bankers and other white-collar workers from the mainland.
Faced with a tax rate as high as 45% -- up from about 15% previously -- Chinese professionals across Hong Kong are considering moving back home to avoid getting squeezed by both the new levy and sky-high living costs in the former British colony, according to interviews with workers and recruiters.
The prospect of an exodus has upended expectations that mainland talent would help offset any outflow of locals and foreign expatriates from Hong Kong, many of whom are looking to escape the city’s controversial new national security legislation.
While it’s too early to gauge how many people will ultimately move out, professionals of all stripes now have reasons to leave a city that not long ago was viewed as one of the world’s most attractive places to build a career. That risks weighing on Hong Kong’s battered economy and further undermining its status as a premier financial center.
Nowhere to Hide
Tax rates significantly higher in Shanghai
Sources: GovHK, Inland Revenue Authority of Singapore, State Taxation Administration of the PRC
Footnote: Personal income tax refers to highest rate in tiered system
The focus on China’s new tax regime has intensified in recent weeks after state-owned enterprises in Hong Kong told workers who transferred from the mainland to declare their 2019 income so they can start paying taxes at home. Chinese SOEs are also informing employees in other locations such as Singapore, Bloomberg News reported last week.
While Chinese authorities revised the nation’s tax rules in January 2019, they only recently disclosed detailed instructions on how to comply -- a move that caught many workers off guard.
For now, it appears that only SOE employees who transferred from China have been explicitly instructed to pay taxes on their 2019 income. It’s unclear how stringently Chinese authorities will apply the tax laws to citizens who were hired overseas or who don’t work for state-owned companies. China’s Liaison Office in Hong Kong and the State Taxation Administration didn’t respond to faxes seeking comment.
Some companies may act to soften the blow by boosting salaries, particularly for high-ranking executives, but most employees will likely have to absorb the hit to their take-home pay, according to Feng Ao, president of Wosheng Law Quotient Academy, a consultancy that advises China’s banks, insurers and trusts on tax laws.
“For the vast majority of employees, the chance of giving subsidies and raises depends on the company’s profitability,” Feng said. “It’s unlikely to happen given the global macro environment amid the pandemic.”