Brunei, HK sign pact on double taxation

BRUNEI and Hong Kong yesterday signed an agreement to avoid double taxation and to allow the two governments to monitor and track down potential tax evaders.

The deal moves the Sultanate a step closer to being stricken off the Organisation for Economic Cooperation and Development's (OECD) watchlist of tax havens.

Brunei's Second Minister of Finance, Pehin Orang Kaya Laila Setia Dato Seru Setia Hj Abdul Rahman Hj Ibrahim, signed on behalf of His Majesty's Government, while John Tsang, the Hong Kong Financial Secretary, signed for the Hong Kong government.

The tax deal will come into force after the completion of ratification procedures on both sides.

In September, wire reports said Brunei was among countries hailed by the OECD for making big strides in the fight against tax evasion after agreeing to share banking information made possible through tax treaties. However, Brunei still remains on OECD's "grey list" as one of the states that has committed to the internationally agreed tax standard, but has yet to substantially implement it.

An officer from the Ministry of Finance earlier said Brunei is awaiting consideration for the OECD "white list" after steady progress in ratifying required international tax agreements. While Brunei is still on the "grey list", "our objective has always been to move forward into the white list", the ministry officer said in December.

Being on the "grey list" means a state has committed to internationally agreed tax standards, but has yet to substantially implement them. The "white list" names jurisdictions deemed to have substantially implemented the OECD tax standard for transparency and exchange of information.

In a statement, Hong Kong said the deal with Brunei would be the sixth comprehensive agreement for the avoidance of double taxation it has concluded. It said the deal will eliminate double taxation instances which would be encountered by Hong Kong and Bruneian investors. "It will bring about tax savings and certainty in tax liabilities in connection with cross-border economic activities," it added.

It said the deal will also help to foster closer economic and trade links between Brunei and Hong Kong and provide added incentives for Bruneian enterprises to do business, or to invest in Hong Kong and vice versa. Hong Kong said the deal marks a new page in supporting the international effort in enhancing tax transparency.

The deal is among the first batch of double taxation avoidance deals Hong Kong had signed using the latest OECD standard on exchange of information.

Tax deals with the Netherlands and Indonesia deals, both adopting this new standard, will be signed on March 22 and 23. It is expected that more tax deals using this new standard will be signed.

In the absence of the deal, profits of Hong Kong trading companies doing business through a permanent establishment, such as a sales outlet, in Brunei may be taxed in both places if the income is Hong Kong sourced.

Under the tax deal, double taxation is avoided in that any Brunei tax paid by the companies shall be allowed as a deduction from the tax payable in Hong Kong.

Also, in the absence of the deal, Hong Kong residents receiving interests from Brunei are subject to a withholding tax, which is currently at 15 per cent. Under the agreement, this will be reduced to 10 per cent.

If the recipient is a bank or financial institution, the withholding tax rate will be further reduced to five per cent.

Brunei has also agreed to lower the withholding tax on royalties received by Hong Kong residents from Brunei from the current rate of 10 per cent to five per cent.

Also, Hong Kong airlines operating flights to Brunei will be taxed at Hong Kong's corporation tax rate (which is lower than Brunei's).

Profits from international shipping transport earned by Hong Kong residents that arise in Brunei, which are currently subject to tax there, will also enjoy tax exemption under the deal.The Brunei Times