In Brief: Taxing weekend, Bo’ao dressing & H.K. braces for trade fallout

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Decoding the Tax Cuts and Jobs Act

Two extra days might not be enough for many U.S. taxpayers to unravel deep changes to the Internal Revenue Code, say experts in Hong Kong, as December’s Tax Cuts and Jobs Act introduced a number of significant changes for both individuals and corporates.

Americans have two extra days to file their federal income tax returns this year, because April 15 – the usual deadline – is a Sunday and the following day is Emancipation Day in the District of Columbia.

That 48 hours of grace might not help puzzled filers – both individual and corporate – fretting over forms. “Individual clients have been asking ‘how am I affected by the new tax reform,’” says Christopher Chang, director of American Pacific Tax in Hong Kong.

The answer, in many cases, is for both richer and poorer. “Most measures will be welcome but some will cause problems,” says Allan Wilkinson, a director at Buzzacott in Hong Kong who works with the firm’s expatriate tax services team.

One key change is the doubling of lifetime estate tax exemptions. “There are lots of opportunities for long-term succession planning, including lifetime gifting,” says Wilkinson.

For companies, one standout issue is a corporate tax rate reduced to 21 percent. “This is a game changer in terms of how to structure business activities and property ownership,” he says.

He also notes the abolition of an alternative minimum tax for corporations and a significant increase in exemptions and phase-out thresholds for individuals.

Chang said one obstacle for many taxpayers is Internal Revenue Code section 965. “We have been dealing with the complexities of IRC 965, which requires certain U.S. shareholders of foreign corporations to pay U.S. tax on accumulated foreign earnings.”

Wilkinson also noted the abolition of many itemized deductions and imposition of limits to some, including the state tax deduction. “This will leave some wealthy taxpayers living in high-tax states worse off.”

Pearls of wisdom in Bo’ao

Chinese President Xi Jinping’s April 10 speech at the Bo’ao Forum for Asia, appears to have assuaged U.S. President Donald Trump and his economic hawks – at least for now. “We will make great progress together!” Trump said on Twitter in response to Xi’s “kind words on tariffs and automobile barriers.”

Yet there was very little new in Xi’s apparent concessions. “[It] is in line with positions already laid out at the … [19th National Congress of the Communist Party], which set out China’s high-level economic plans,” noted Lillian Li, senior analyst, credit strategy and research at Moody’s. Longtime China watcher Patrick Chovanec was blunter. “Xi’s speech was completely unexceptional,” said the Silvercrest Asset Management chief strategist, adding it would have been ignored “had markets not been desperate for a reed of hope, or pundits not desperate for some domestic U.S. political spin.”

Hong Kong steels itself for fallout

Hong Kong is also looking for some reassuring words, as it fears being squeezed between the U.S. and China in the event of a trade war.

Edward Yau, Hong Kong’s secretary for commerce and economic development, told a TV program on April 9 that Hong Kong should “stay vigilant and not be frightened” about the prospect of escalating tariffs. 

More constructively, the Hong Kong government is awaiting a response from Washington on its applications – conveyed by Yau’s office through the U.S. Consulate-General in Hong Kong and the World Trade Organization – for an exemption from recently announced tariffs, which could affect HK$60 billion (US$7.6 billion) of its goods. Hong Kong is also opposing earlier U.S. tariffs on steel and aluminum exports, which accounted for about US$40 million in 2017, mostly re-exports.