Before the Financial Secretary issued the 2010/2011 budget on February 24, 2010, he had asked the business community, as well as other interested parties, to submit their “budget wish list” to him. Among the organisations that responded were:
- The Hong Kong General Chamber of Commerce (“HKGCC”)
- The British Chamber of Commerce
- The Hong Kong Institute of Certified Public Accountants
- The Taxation Institute of Hong Kong
On reviewing the submissions from those organisations, I noticed that all were lobbying the Government to enact new provisions to allow group relief for losses and/or the carry-back of agreed tax losses to prior years of assessment. Whilst there is strong support for the introduction of group relief provisions, the minimum the business community sought was the ability to carry back losses.
This was not the first time that this request had been made. In his 2006 Budget speech, Henry Tang made the following argument for not introducing group relief:
“With the development of today’s financial tools, group loss relief can easily be observed as a means to evade tax, and such activities would be very difficult to combat. I estimate that the suggested exemption, if implemented, would cost billions of dollars a year in lost tax.”
However, such countries as Australia, France, Germany, Japan, the Netherlands, the United Kingdom, the United States and Singapore, to name but a few, have provisions that provide for group relief, on either a consolidated basis or a loss transfer basis.
The absence of group relief places a conglomerate, operating through a group structure, at a tax disadvantage when compared with a single legal entity that can offset profits and losses between its business divisions. There are many reasons why a group structure makes commercial sense. For example, it could be a means of protecting individual businesses from non-tax risks. So it makes no sense for modern legislation to create this uneven playing field.
Again, I refer to the HKGCC’s response to the allegations that such legislation would require additional complex legislation and that there could be a loss of revenue through schemes for avoiding profits tax:
“Singapore only added one section (Section 37C) to the Singapore Income Tax Act when it introduced the group loss transfer system… Singapore did not deem it necessary to enhance its own anti-avoidance legislation and, to the best of our knowledge, has not had to resort to application of even the existing regulations to any taxpayer.”
Clearly, the more simplistic of the two proposals is the carry-back of agreed tax losses for a given period. All that this legislation would require is that current year’s agreed tax losses could be offset against prior-year profits for a given period, commencing with the proceeding year, with any unrelieved loss being carried forward. The taxpayer would receive a refund of tax paid as opposed to a reduction of future tax liabilities. Loss carry-back provisions can be found in the legislation of many countries, including Canada, France, Germany, Ireland, Japan, the Netherlands, Singapore, the United Kingdom and the United States.
Whilst the current Financial Secretary has been quiet on this issue, Henry Tang commented in 2006:
“While taxpayers who suffer losses in their business may be helped to a certain extent to tide over difficult times by loss carry-back arrangements, this would place enormous pressure on tax revenue during periods of economic downturn. The government would not only suffer a loss in tax revenue, but also have to refund tax collected in proceeding years.”
I am unsure as to the significance of the “loss in tax revenue”, as there would be no additional loss of revenue in the year the loss was incurred and the value of the losses carried forward would be reduced. Furthermore, the reality is that this is only a timing difference as opposed to an actual loss of revenue, unless, of course, the taxpayer never became profitable again.
The benefits to taxpayers of these two proposals are very clear. They could facilitate better cash flow; encourage companies to expand their activities in Hong Kong, and reduce the amount of additional capital that may be required.
Clearly the business community considers that these amendments to the Inland Revenue Ordinance are both appropriate and necessary. Notwithstanding the fact that such proposals have been adopted by many other jurisdictions, they have been steadfastly ignored by the Financial Secretary. Despite assurances to the contrary, I feel that the Government is not listening to the business community. However, I do fully endorse the view that issues of this nature need to be discussed more frequently and openly, not simply by select committees.
