India And Hong Kong Finalize Double Tax Avoidance Agreement After Years Of Negotiation

India and the Hong Kong Special Administrative Region (HKSAR) of China recently entered into a double tax avoidance agreement (DTAA). After years of negotiation, the bilateral DTAA was approved on November 10, 2017.

When it comes into force, the India-Hong Kong DTAA will hold important tax implications for international businesses operating in both countries. The agreement will also benefit trading companies that do not have a permanent presence in India but service to an India-based entity.

What is DTAA?

Non-resident Indians (NRIs) and foreign nationals doing business in India make profits in India as well as in other countries of operation. Such businesses often have to pay tax twice on the same source of earned income or profit in India.

As a general principle, international businesses in other countries are taxed on their territorial income, which is the income generated within the territory of that country. India, on the other hand, imposes a corporate income tax on the worldwide income of business enterprises that have a permanent presence in India. As a result, India-based multinational companies deriving income from other countries face double taxation on their earned income.

A DTAA creates a fair and certain tax environment for business activities carried out between two countries. It prevents international businesses from paying tax in the country where the income or profits are generated. Or, in some cases, it allows the country to deduct tax at source, and offers businesses a foreign tax credit to reflect that the tax has already been paid.

The methodology for double taxation avoidance, however, varies from country to country.

India’s DTAA with Hong Kong

India has over 86 DTAAs in force with various countries, which provide tax relief on transactions carried out between India and those countries. Each DTAA specifies the agreed rates of tax and the jurisdiction on the specified types of income involved.

The India-Hong Kong DTAA offers similar provisions. The DTAA will give protection against double taxation to over 1,500 Indian companies and businesses that have a presence in Hong Kong as well as to Hong Kong-based companies providing services in India. It will provide clarity to businesses regarding tax rates and tax jurisdictions, as they will now be taxed in only one of the signatory countries. This will allow investors to be more confident about their investment decisions.

Aside from tax relief, there are several other benefits that the India-Hong Kong DTAA will offer to the concerned businesses. These include:

  • Lower withholding tax (tax deducted at source or TDS) rates, which can be as high as 40 percent in the absence of a DTAA;
  • Lower dividend distribution tax (DDT), which is an additional tax levied on foreign investors besides the corporate income tax; and
  • In certain circumstances, credits for taxes paid on the double-taxed income that can be encashed at a later date.

Other details regarding the DTAA are yet to be announced.

Chris Devonshire-Elllis of Dezan Shira & Associates comments: “Hong Kong has a very well established Indian diaspora that has been there for decades and has much wealth and business influence within the territory. It is a very positive sign that the DTAA has been agreed as businesses in both India and Hong Kong have finally been given better financial incentives work together and increase trade and prosperity in both their respective areas”.


Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Alibaba-Backed Company Could Turn The Tide For Chinese IPOs in US After String of Busts

IPOs in 2017

The pipeline of Chinese (FXI) IPOs planning to list on the New York Stock Exchange (SPY)(NYSE) (NDAQ)could make 2017 the biggest year for the country’s stocks since 2014 when Alibaba (BABA) listed its shares. After a dull 2016, analysts expected 2017 to be an overall weak year for IPOs. Last year, cyclical trends and global events kept companies away from public markets, but 2017 has seen considerable price action and an active IPO market. With confidence in stock markets booming back after the US election late in 2016, companies are lining up with IPOs.

2016 saw new listings worth $119.4 billion on the New York Stock Exchange with Chinese logistics company ZTO Express (ZTO) being the largest with an IPO worth $1.4 billion. So far in 2017, 137 IPOs worth $27.2 billion have been announced in the United states, 6.6% higher year over year.

Mark Hantho, Global Head of Equity Capital Markets at Deutsche Bank expects 2017 to be a good year for fresh equity raising. “On balance, we have a fairly healthy market that people have been participating in. The class of 2017 is doing fine and there is encouragement by those giving advice to clients that this market is wide open,” he mentioned.

Not all Chinese IPOs can recreate Alibaba’s story

IPOs by Chinese firms have not had much success in gaining popularity among investors in the US since Alibaba(BABA) three years ago. The weak performances for both China Rapid Finance (XRF) and ZTO Express (ZTO) on the New York Stock Exchange is a sharp contrast to 2014 when a number of premium players including Alibaba(BABA), Weibo (WB) and (JD) gained hefty valuations with their shares rallying admirably within the first 6 months of listing.

Since then, China’s economic growth has slowed down but US investors continue to closely follow large Chinese names. Shares of Alibaba(BABA) are up 42% while shares of have surged 94.9% since their IPOs in2014. Shares of Baidu are currently trading 19 times of its IPO price.

While stocks like Alibaba, Baidu (BIDU), and continue to attract to investor attention long after their blockbuster IPOs, the same is not true for all Chinese companies. Smaller Chinese companies with market values less than $1 billion listing in the US have not received positive responses, with some having de-listed from New York and now eyeing a China listing instead.Chinese companies like (WBAI), Tuniu Corp (TOUR) and Kingold Jewelry (KGJI) listed their shares on US Stock Exchanges in 2014, but currently trade nearly 60-80% below their issue price. Such stock behaviour creates negative sentiment around Chinese companies listed in the US.Similarly, Sky Solar Holdings (SKYS) listed on the NASDAQ in 2014 but is down 85% since its listing. Meanwhile, Leju Holdings (LEJU) that listed in 2014 at $12, is now trading at $1.79.ZTO Express,(ZTO) the largest IPO in 2016 is now trading 26% below its issue price of $19.50. ZTO Express provides shipping and delivery services to Alibaba. The company raised $1.4 billion last year, but opened $1.10 lower than its issue price of $19.50. For an IPO of this scale the performance was somewhat of a surprise for investors.

James Guo, the CFO of ZTO mentioned that the stock performance post-IPO was not in line with what was expected during the roadshow. “Pricing IPOs is always very difficult,” he said. “We met with hundreds of investors all over the world over the past two weeks and investors were very excited about our story. We saw strong momentum during the book-building process, and the deal itself ended up being over 15 times subscribed.”

“We priced the offering at a level that we thought would be fair for all parties involved. Of course it’s usual to see some volatility in the stock price of deal that is as big as ours, but as far as the share price goes, it’s not our place to comment. We’ll let investors in the market decide that. At the end of the day, we think that if we continue to focus on executing our strategy and creating value for our shareholders, the share price will take care of itself over the long term,” he continued.

China Rapid Finance raised $60 million in an IPO on the New York Stock Exchange in May 2017. Since it’s listing, shares of China Rapid Finance are down 7.81%. Shares of the company received tepid response from investors hinting that US investor appetite for Chinese companies may indeed be fading away.

So what is driving the sentiment for Chinese companies in the US?

  • Expectations mismatch – Investors expect big returns like Alibaba from all Chinese IPOs and tend to invest without proper due-diligence. When these companies cannot match up to their growth and return expectations, they are disappointed. With the biggest Chinese IPO in New York in 2017 so far coming up soon, Best Logistics, it’s important to remember that a Chinese company’s IPO in New York does not necessarily mean a robust company that could provide superlative returns.
  • Risks of delisting – Negative sentiment on Chinese stocks on US exchanges have led to many companies delisting and listing in China instead. Risks of a potential delisting keep US investors away from smaller Chinese stocks. Further, Chinese companies that suffer poor valuations in the US prefer to re-list in China as it is easier for them to attract investors in their country.

Matthew Kwok, chief strategist at China Yinsheng Wealth Management Ltd, addressed Gushan delisting from the US, “It’s understandable that the owner is planning to relist somewhere he can get a better valuation for his assets.”

Paul Boltz, a lawyer with Ropes & Gray LLP believes, “The Hong Kong market is not seen to have a ‘China discount’ like in the U.S. and it is thought that investors here are more likely to understand and place a higher value on Chinese companies.” He continued, “There’s a perception that investors in the U.S. markets don’t understand or bother to fully appreciate the business models of many companies operating in China.”

  • Lack of transparency and understanding of business models – Lack of transparency, poor corporate governance and reporting also keeps investors away from Chinese companies. Add to this home bias and the fact that Chinese companies are known for corruption and frauds. This creates negative sentiment towards lesser-known Chinese stocks and these IPOs are largely unrecognized by US investors. Further, US investors find business models of Chinese companies complicated.

But can Best Logistics turn the tide?

However, the recently announced IPO by Best Logistics could turn the tide for Chinese IPOs in New York.

Alibaba backed Best Logistics filed an IPO in the United States to raise $1 billion to fund expansion of its parcel delivery, transportation and convenience store delivery services. This will be the biggest Chinese IPO in New York so far this year, and the connection with Alibaba will hopefully help Best live up to its name.

Alibaba owns 23.4% of the company and had a valuation of $3 billion at its last funding round in 2016. Further, the company’s revenues have nearly tripled in the last three years to $1.3 billion (in 2016) but the company is still operating at a loss. In 2016, the company reported losses of $200 million, which could be a matter of concern for potential investors.

Overall, the sentiment has not yet turned positive for upcoming Chinese IPOs and Best Logistics will be watched closely as a bellwether for help pave the way for future companies from mainland China to list in the US.

Behind The Scenes: The Story Behind The Return of Hong Kong to China 20 Years Ago

July 1, 2017 is the 20th anniversary of the return of Hong Kong to China from the United Kingdom. I was lucky enough to have a behind the scenes seat on the China side in the run up to that historic event and wanted to share a few of my personal experiences and observations.

It was an amazing achievement for the politicians on all sides to negotiate the peaceful return of Hong Kong back to China from the United Kingdom after the Brits had been there for over 100 years.

It was a bittersweet event for the UK. Many in the UK decried the event and dubbed it the “end of the British Empire.” On the other hand, Britain recognized the new realities of the rise of mainland China and that it was in Britain’s long-term best interest to return HK to China which would engender a tremendous amount of goodwill and future economic benefits to the UK as China continued to grow.

The politicians concluded the treaty, but on the financial side there were a lot of questions. Would the Hong Kong dollar remain independent? Would the historical hard link to the US dollar be maintained? What about investment coming into and out of Hong Kong? Would capital controls be imposed? Would people be able to take money out of Hong Kong? Would the mainland slowly strangle Hong Kong and move the financial center of China to Shanghai, the historical financial center of China? What about contract law and trading? Stock market investments and other investments? Would Hong Kong dollar bonds be allowed? Would banks continue to operate as usual? These and many more technical financial market issues had to be answered.

To handle the financial side of the handover China assigned the Deputy Governor of the People’s Bank of China (PBOC, China’s central bank), Mr. Chen Yuan to smoothly implement the financial related issues of the treaty. I had been working with Mr. Chen Yuan as an investment and financial advisor to PBOC since 1993. When Mr. Chen was given this supervisory role in Hong Kong he summoned me to meet with him in Beijing to go over the strategy and implementation of the financial parts of the handover in late 1996.

Mr. Chen knew there were many risks in the execution and implementation of the handover. There would be the inevitable comparison of British rule to the new China oversight. Some of the risks had been defused by having some provisions take effect over a multi-year period. But there were clear immediate financial market risks in the run up and right after the actual handover operationally.

Mr. Chen explained to me that one of his biggest concerns was the stability of the exchange rate between the US dollar and the Hong Kong dollar. He wanted to make sure that currency speculators did not attack the Hong Kong dollar and force a depreciation right at the time of the handover. Little known to the speculators was the fact that China would do absolutely everything in its power to insure a smooth financial transition because they wanted to show Taiwan how smooth things would be when Taiwan rejoined the China fold.

We both were concerned that hedge funds and other currency speculators would take the opportunity to challenge the strength of the Hong Kong dollar and China’s resolve as a newly emerging power in international markets.

Mr. Chen asked me to provide currency and bond market condition reports and forecasts to traders at the PBOC daily, and especially focus on market activity in the Hong Kong dollar and interest rate markets.

At Mr. Chen’s office at PBOC headquarters in Beijing there was a credenza behind his desk. On top of the credenza was a single phone. Mr. Chen handed me a card with a phone number on it and said, “This is the number to my private phone (he pointed to the phone on the credenza). Call me anytime on my private line if there is any important market activity or information that you think I need to know personally.” I felt privileged and trusted to be given private access to Mr. Chen.

As 1997 started, the Asian Financial Crisis was developing. Countries around Hong Kong were having their currencies repeatedly attacked by speculators in an attempt to force the currencies lower in value. Many countries in Asia had made a fundamental funding mismatch mistake of funding local projects in US dollars. As their local currencies devalued the cost of repaying the dollar borrowings skyrocketed, which caused more currency attacks.

During the months in the run-up to the July 1st handover, Mr. Chen was becoming increasingly concerned of the negative impact of an attack on the Hong Kong dollar as the Thai baht, Malaysian ringgit, Indonesian rupiah and other currencies got hit. I was getting more concerned as well. The timing of the handover from a financial point of view could not have been worse. There was financial panic all around Asia, and HK was in the middle of it.

My analysis for PBOC was that HK was in a much less vulnerable position than many Asian countries because the amount of currency mismatch was less, HKMA reserves to defend the HK dollar were adequate, and interest rates could be used to punish attackers. Still, as currency after currency unraveled, the speculators became increasingly bold.

My market intel sniffed out a number of complex threats to the Hong Kong dollar.  Some funds were in fact building short Hong Kong dollar positions. Others were using clever anti-HK arbitrages. But Mr. Chen and PBOC, along with the Hong Kong Monetary Authority had built in defenses to repel most attackers.  PBOC’s trading desk used my reports to help keep markets stable through their daily operations.

I used the “PBOC Chen Hotline” once before July 1. I got through to Mr. Chen and recommended that he have a senior official in Beijing communicate to markets that Beijing stood 100% behind the Hong Kong Monetary Authority and would provide the HKMA with all resources necessary to support the HK dollar.

Shortly thereafter, Mr. Chen and other officials became publicly more vocal in their support of Hong Kong by Beijing as a way of facing down the speculators.

The attacks were rebuffed in the currency markets through market intervention, pushing up short-term interest rates, using reserves to support HK’s equity market and psychological ploys and strategies (the least expensive and most fun of all our techniques). The crisis did not spread throughout Hong Kong financial markets.

July 1st came and went smoothly and Hong Kong was returned to China without a serious political or financial market glitch. A testament to all parties involved.

Now 20 years later one can see the wisdom of the actions of the United Kingdom, China and Hong Kong. China continued to power ahead and in the process raised the standard of living for hundreds of millions of people. The UK has benefitted in a number of ways through trade and investment in China’s development. And Hong Kong, after a brief hang-over from the handover remains one of the wealthiest and most important financial centers in the world.

In 1998, partly based on his adept handling of the smooth transition of HK back to China, Mr. Chen was promoted to be the head of China Development Bank. In that role Goldman Sachs called him “the most important person in finance in the world.” For me, it was a career high point to be behind the scenes and play a small part as positive history was made by great historical figures.

Today, short side speculators are again poking at the Hong Kong dollar. They have asked me what I think. Given 15 years of behind the scenes experience with PBOC my answer is to find out what China wants to do, and then bet with China.


William Lawton is Chairman and CEO at Seagate Global Group.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Hong Kong: The Country With the Simplest Tax System in APAC

Only two countries from Asia-Pacific (APAC) figure in the bottom 10 of the 2017 Financial Complexity Index constructed by the Netherlands-based TMF Group. The index has been designed to study the complexity of accounting and tax compliance frameworks globally. The bottom 10 represents countries with the least complex systems.

The Group had selected 94 countries for the analysis, 20 of which were from APAC. Among the two which made the bottom 10 from the region were Hong Kong and Cambodia. Since the report only highlighted the former, we’ll take a closer look into this jurisdiction below along with its standing in the World Bank’s Doing Business report.

Hong Kong

Hong Kong is the fourth best place for doing business in the world and the second best in Asia. Singapore is the best place of doing business from APAC, ranking second in the world according to the Doing Business report.

Though we’ve highlighted ‘paying taxes’ as the parameter in which the country has done the best – it ranks third in the world – there are other criteria in which it has the same ranking, including ‘protecting minority investors’ and ‘starting a business’ among others. Given the focus on tax systems, the aforementioned parameter was the most relevant, thus finding a place on the table above.

Better tax system

Though Hong Kong takes second place to Singapore as a place of doing business in APAC, it has the simpler of the two tax systems according to the Complexity Index. This is, in a limited way, corroborated by the Doing Business report as well, which ranks Singapore 8th in the world in ‘paying taxes’.

The country does not levy any sales or value-added tax. It asks for only three taxes – salary, corporate income, and property.

A feature highlighted by the report which makes the tax system in Hong Kong attractive is that taxes are levied on a territorial basis. This implies that if an entity has global operations, it has to pay taxes only on income from its Hong Kong offices. This feature is available to all entities and is not affected by the residential status of taxpayers.

There are a few regulatory requirements that entities need to adhere to though. The report cited the requirement of keeping accounting records for seven years. There is a provision of heavy fines for directors if bookkeeping requirements are not met.

However, this is not a big ask for doing business in one of the most important financial centers in APAC. This simple system also justifies the “One country, two systems” philosophy. While China is on the list among the 10 countries with the most complex tax systems, Hone Kong leads the region with the simplest system.