Japan, Hong Kong Sign First Tax Treaty
On 9 November 2010, Japan and the Hong Kong Special Administrative Region of the People’s Republic of China (“Hong Kong”) signed the first income tax treaty (the Treaty) between the two jurisdictions.1 The two governments reached a basic agreement in March 2010, and since then have been negotiating details of the text of the Treaty.
The Treaty includes an “income from employment” article (article 14) which includes the standard paragraphs typical of most income tax treaties.
• Paragraph 1 states that salaries, wages, and other similar remuneration derived by an employee are taxed only in the country of residence, except that employment income may be taxed in the other country if services are performed in the other country.
• Paragraph 2 sets out the exception to paragraph 1. The country where the employment is performed (the “other country”) may not tax the income if all of the following conditions are satisfied:
1. the individual is present in the other country for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable year concerned;
2. the remuneration is paid by, or on behalf of, an employer who is not a resident of the other country; and
3. the remuneration is not borne by a permanent establishment which the employer has in the other country.
Background: Japanese Tax Treatment of Short-Term Business Travelers
In respect of short-term business travelers to Japan, under Japanese domestic law, these individuals are liable for Japanese income tax on the compensation relating to their Japan workdays. There is no de minimis rule regarding the number of days or amount of income that may be exempt from Japanese income tax, so even one work-day in Japan creates an income tax liability on the compensation associated with that day. As a result, business travelers from Hong Kong, in the absence of an income tax treaty have been liable for Japanese income tax on the compensation relating to their work-days in Japan.
As a consequence of Japan’s tax treatment of short-term business travelers, employers have had to manage the risk of being tax compliant while also being mindful of the practicalities of income tax reporting for every single trip. The new Treaty between Japan and Hong Kong, when it enters into force, doesn’t remove the need for employers to keep track of their business travelers in Japan to determine tax reporting; however, it will likely make the income tax reporting less burdensome.