With Hong Kong’s budget only four months away, give or take a few weeks, now is the time to make your own views known to the Financial Secretary, Mr John Tsang.
People may consider this a futile exercise, but in my opinion this is far from being the case. The 2009 budget lacked substance, or at the very least any original thought, as to how the Government will help people suffering from the economic downturn. It wasn’t until the community expressed its own dissatisfaction with the budget proposals and reinforced the needs of both individuals and business that something was done.
Our tax rates are affordable, and although our competition seeks to lower headline direct tax rates, this is usually done at the expense of raising the rates of indirect taxes or introducing new taxes such as value-added taxes or other forms of consumption or sales taxes. Direct and indirect taxes, together with the land premium, account for most of the Government’s revenue. Implementing proposals that have the net effect of eroding this tax basis without increasing collections from other sources will severely hamper the Government’s ability to fund its social welfare programmes. My first “wish list” therefore consists of proposals that would enhance Hong Kong’s attractiveness as the prime location for establishing a business in Asia, with minimal loss of revenue to the Government.
The following is a very brief description of these measures. Some of them have been voiced in the past, have been ignored and now need to be restated. I intend to comment further on those issues in subsequent “Rants”.
(1) Greater Clarity and Understanding of How to Ascertain Whether Income is Subject to Hong Kong Tax Section 14 Inland Revenue Ordinance (“IRO”)
A corporate manager needs to have a clear understanding of a company’s liability to taxation. It’s unfortunate that there is widespread uncertainty about how the Inland Revenue Department (“the Department”) will apply S.14 IRO, Hong Kong’s charging section to Profits Tax.
The Department needs to amend its “Departmental and Interpretation Practice Note No21 – Locality of Profits” to reflect recent case decisions that have considered the meaning of the words “profits arising in or derived from Hong Kong” and that are accepted as legal precedents. These include the determination of what constitutes an offshore employment and the correct approach that the Department should adopt in determining whether profits accruing to a business are subject to Hong Kong tax. In particular, the Courts have clearly stated that the adoption of a “totality of facts” approach leads to an unnecessary and time-consuming review of antecedent and inconsequential acts, and have recommended that the Department focus instead on a company’s activities more immediately responsible for earning the profit in question.
(2) Introduction of Group Relief for Losses
This has been on every businessperson’s agenda for a very long time. This regime enables group companies (to be defined by a percentage of shares held) to surrender or sell tax losses to other companies within the same group. There is no loss of tax revenue to the Government unless a company is liquidated or sold, merely an acceleration of relief for the taxpayer. Group relief provisions are made available by most sophisticated jurisdictions and should be introduced in Hong Kong. This would also avoid the need for companies within a group to charge each other “tax-driven” management fees etc.
(3) Carry Back of Losses
Whilst group relief provisions are common, those jurisdictions that do not permit group relief will normally allow a taxpayer to carry back losses for a period up to five years. Again there is no loss of revenue to the Government, merely an acceleration of relief, as losses would normally be set off against future profits earned by the company.
(4) Expansion of Tax Treaty Network
We have seen an increase in activity in this area, which will soon be facilitated by an amendment to the Inland Revenue Ordinance to permit the Department to provide wider exchanges of tax information to tax-treaty partners. However, every attempt should be made to negotiate double taxation treaties with Hong Kong’s trading partners.
(5) Tax Incentives for Research and Development
Whilst this will cost the Government tax revenues, it is nevertheless an integral part of a strategy to attract and retain talent and knowledge in Hong Kong. In order to be competitive with other Asian countries, the Government should consider introducing incentives in the form of additional tax deductions for qualifying expenditure. I suggest that this should initially be 150% of the expenditure incurred and should focus on scientific research.
(6) A Reduced Taxation Rate for Small Companies
To assist small companies, I would recommend a 10% tax rate for companies with an assessable profit of less than HK$2m. Whilst this will inevitably cause a reduction in revenue for the Government, I do not anticipate that this will be significant, as “small” companies account for only a relatively small percentage of profits tax collected. Such a two-tiered system would do nothing more than put Hong Kong on a similar basis as our Asian neighbours, and would encourage entrepreneurs and new enterprises to locate their operations in Hong Kong.
These are just a few of my preliminary thoughts. I would appreciate hearing from you about the issues that are close to your heart and need a bit of a “push”.
