The Government said it will make the legislative amendments to combat cross-border tax evasion.

The European Union today announced the inclusion of Hong Kong in its watchlist on tax co-operation as it considered that the non-taxation of certain foreign sourced passive income in Hong Kong might lead to situations of double non-taxation.

Responding to media enquiries on the announcement, the Government noted that Hong Kong has adopted the territorial source principle of taxation over the years, whereby offshore profits are generally not subject to profits tax in Hong Kong.

It stressed Hong Kong will continue to adopt this taxation principle and will uphold its simple, certain and low-tax regime with a view to maintaining the competitiveness of the city's business environment.

The Government noted that as an international financial centre, Hong Kong has all along been actively participating in and supportive of international tax co-operation.

To support combating cross-border tax evasion, the Government agrees to co-operate with and has committed to the EU to amend the Inland Revenue Ordinance by the end of next year and implement relevant measures in 2023.

The proposed legislative amendments will merely target corporations, particularly those with no substantial economic activity in Hong Kong, that make use of passive income to evade tax across a border. Individual taxpayers will not be affected.

Financial institutions' offshore interest income is currently subject to profits tax under the ordinance and hence the legislative amendments will not increase their tax burden.

The Government will consult the stakeholders on the legislative amendments and strive to minimise the compliance burden of corporates.

The EU published the guidance on the foreign sourced income exemption regime in October 2019 and began corresponding assessment on the tax arrangements of a number of tax jurisdictions including Hong Kong.

The Government has been in contact with the EU on its assessment and has been actively engaging with the EU on the follow-up work.

It reiterated that Hong Kong enterprises will not be subject to defensive tax measures imposed by the EU as a result of being included in the watchlist on tax co-operation, adding that it will request the EU to swiftly remove Hong Kong from the watchlist after the relevant tax arrangements are amended.