For many years, Hong Kong’s professional bodies and Chambers of Commence have lobbied the Government to amend the Inland Revenue Ordinance to allow group loss relief. Of the many arguments advanced for the introduction of such legislation, the following have consistently found support from lobbyists:
Corporate groups in Hong Kong may:
• pay tax as a group even though the consolidated group accounts may show a loss
• have a higher effective tax rate
• be disadvantaged from a cashflow standpoint
• feel forced to adopt contrived strategies to utilise stranded tax losses
• have inadequate resources to embark on new business initiatives that would suffer losses in the initial years of operation
In March this year, Professor KC Chan, the Secretary for Financial Services and the Treasury, stated:
“The “group loss relief” suggestion involves a number of complicated issues, such as how to ascertain whether companies are members of the same group, and their loss set-off arrangements with each other. The proposed measure could also be easily abused for tax avoidance. Hence, its implementation must be complemented by complicated legislative provisions to define clearly the scope of application so as to avoid tax abuse. This would inevitably complicate our simple tax regime. Separately, as small and medium enterprises (SMEs) in general do not operate as a group, the “group loss relief” suggestion would not benefit the SMEs at large, which constitute 98% of business establishments in Hong Kong.
As for the “loss carry-back” suggestion, since the proposed measure may result in tax refunds at any time, it may cause drastic and unpredictable fluctuations in tax revenue, rendering the tax revenue more vulnerable to economic cycles. We believe that our current arrangement for enterprises to carry forward their losses without time limit to offset profits in future years should be able to assist enterprises to manage their losses and remains attractive to investors.
Given the above considerations, we are of the view that it is not appropriate to introduce the “group loss relief” and “loss carry-back” arrangements at this juncture.”
This view is not shared by our neighbours, with which Hong Kong competes to be recognised as the favoured location for the establishment of regional headquarters or as a base for Asian business operations. Australia, New Zealand, Singapore, Malaysia and Japan, Hong Kong’s principal competitors, permit group relief, whether on consolidation or in the form of loss transfer.
Personally, I find the reasons advanced by the Government a poor excuse for its failure to undertake a thorough review of this issue. It is also very sad that the Government does not feel it appropriate to issue a consultation paper to the appropriate interested parties for their views and recommendations as to how group relief could be implemented in Hong Kong. Of course doing nothing is the easier option.
