Hong Kong government may revise tax rates to boost city’s competitiveness and growth

Cannix Yau

Facing staggering deficits and daunting financial challenges, the government may revise tax rates to boost Hong Kong’s competitiveness and growth but will put the brakes on introducing new taxes.

Financial Secretary Paul Chan Mo-po said in his budget speech on Wednesday that Hong Kong needed to increase its revenue and identify new economic drivers to tackle the challenges from an ageing population, warning of a fiscal deficit of HK$139 billion (US$18 billion) next year, accounting for 4.8 per cent of the city’s gross domestic product (GDP).

“We need to maintain the growth and vibrancy of our economy and identify new areas of economic growth, with a view to increasing our revenue, promoting social development, coping with the challenges arising from an ageing population, and providing more quality employment opportunities,” he said.

“Besides, we may need to consider seeking new revenue sources or revising tax rates,” he added. “If we keep running a fiscal deficit, our reserves will eventually be used up. This is something we do not want to see,” he warned.

However, a government source said they had no plans to introduce new taxes but might consider revising tax rates.

Just like in Singapore, to attract foreign investments the city may reduce the tax rate to as low as 5 per cent

Jeremy Choi, PwC Hong Kong tax partner

As part of a solution to boost Hong Kong’s economic growth, Chan announced the use of about HK$22 billion out of the Future Fund to set up the “Hong Kong Growth Portfolio” for direct investment in projects with a “Hong Kong nexus”, meaning the projects must be based or carried out in the city.

He said the purpose was to enhance returns, while also consolidating Hong Kong’s status as a financial, commercial and innovation centre.

“This is also crucial for raising Hong Kong’s productivity and competitiveness in the long run,” he said.

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Separately, HK$20 million has been earmarked to increase the government’s funding ratio from two-thirds to three-fourths for the Technology Voucher Programme and raise the funding ceiling from HK$400,000 to HK$600,000. The number of approved projects for each applicant would also increase from four to six.

A government source explained that interest from the sector in recent years had been increasing, with a rise from about 60 applications per month in 2018 to about 150 applicants per month in 2019.

Jeremy Choi, PwC Hong Kong tax partner, said the city needed to create new sources of revenue as, for the government’s medium range forecast, the operating expenditure would exceed the revenue amid a continuous rise in medical and social welfare bills every year caused by an ageing population.

“If the government fails to expand income or introduce measures to spur the economy, it may be unable to cope with future expenses,” he warned.

Hong Kong faces a deep-seated problem of having a very narrow tax base with relying too much on land sale. Introducing the sales tax could resolve the problem

Simon Lee, co-director of international business and Chinese enterprise programme, Chinese University

Choi suggested the government offer concessionary tax rates for emerging businesses such as the innovation or creative industries, as well as for foreign investors who set up their regional headquarters in Hong Kong, as a way to boost investment.

“The standard profits tax rate stands at 16.5 per cent. The government may consider halving it to 8.25 per cent to attract investors. There must be some criteria for being entitled to the reduced tax rate, such as job creation and a certain amount of spending or investment in Hong Kong,” he said.

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“Just like in Singapore, to attract foreign investments the city may reduce the tax rate to as low as 5 per cent,” he added.

Simon Lee Siu-po, co-director of the international business and Chinese enterprise programme at Chinese University, said he agreed with introducing a sales tax to expand the government’s revenue but it had missed the best timing.

“Hong Kong faces a deep-seated problem of having a very narrow tax base with relying too much on land sale. Introducing the sales tax could resolve the problem. But it’s a pity that the government has been leaving it untouched all these years,” he said.

Financial Secretary Paul Chan says Hong Kong needs to identify new economic drivers to tackle the challenges from an ageing population. Photo: K. Y. Cheng

Former finance minister John Tsang promised in his budget in 2015 to review the feasibility of broadening the tax base, but little has been followed up.

However, Lee said now was not the time to bring in the sales tax. “The best timing for introducing the sales tax is when the economy is good with the government willing to contribute the income back to the society,” he added.

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Lee said during the ongoing economic difficulty, there was not much room for the government to adjust the tax rates, such as increasing the profits tax.

However, he agreed that the government could reduce the tax rates for firms engaging in emerging businesses, such as green technologies or hi-tech manufacturing business, in a bid to boost Hong Kong’s competitiveness.

We understand that the government has been talking about the need to review regulations, remove red tape to create a business friendly environment, and consult various stakeholders more, but we need to see more urgent action on this

Shirley Yuen, CEO, Hong Kong General Chamber of Commerce

Hong Kong General Chamber of Commerce pointed out the government’s failure to introduce regulatory impact assessments into the policymaking process to improve the city’s efficiency and competitiveness.

“We understand that the government has been talking about the need to review regulations, remove red tape to create a business-friendly environment, and consult various stakeholders more, but we need to see more urgent action on this,” the chamber’s CEO Shirley Yuen said.

On tax policy, Chan said in the face of the deficit in the operating account, the government needed to look into ways to increase revenue.

“Adjusting tax rate is one option, finding other revenue sources, having new types of tax [are] the other [options]. At this stage, it would be premature for us to jump into conclusion as to which one is the best, or whether we should do a combination of these,” he said.

Chan said the issue would be of high priority in his work.

This article Hong Kong government may revise tax rates to boost city’s competitiveness and growth first appeared on South China Morning Post

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