Resolving the source problem: A general review with a particular focus on Hong Kong

Hong Kong has a territorial tax system based (almost entirely) on source alone. Globalisation and changes to the structure of business have substantially increased source-related revenue risks. Entities are increasingly able to structure their finances and conduct their business affairs without being constrained by geography or national boundaries. Existing source rules, relying on the nature of income and the geographic origin or location for that particular type of income, do not deal adequately with certain revenue-leakage issues confronting us today and, even more, the likely issues of tomorrow. When the profits of a business enterprise are the result of a combination of transactions, operations and activities in a number of jurisdictions and each transaction, operation or activity contributes to the profit, the source of profits becomes increasingly less clear. The source concept and the source of the source problem in Hong Kong (and Australia) have been discussed in an earlier article. In that article, options on how best to address the source challenge were suggested but looked at only fairly briefly. This article aims to examine in greater detail a series of alternatives recognised as key tax policy options to help overcome the growing difficulties in applying the source concept in the (income) taxation of business profits.