The 2012-13 Budget Speech is due to be delivered by the Financial Secretary, Mr John C Tang, on February 1st 2012. It will be interesting to note the extent to which the Financial Secretary has listened to the representations made by the various Chambers of Commerce and other professional bodies. There seems to be a general agreement that steps need to be taken to alleviate poverty, improve air quality and make available more places in international schools at affordable prices. Interestingly, there is strong support for the implementation of the Chief Executive’s promise to reduce the rate of profits tax to 15%. As an alternative to a reduction in the standard rate of profits tax it is proposed that a lower rate of tax be applied to profits of less than HK$2m. There is also the perennial call for the introduction of group relief and/or the carry back of tax losses, relief for voluntary contributions made by individuals to their MPF schemes and the simplification of the procedure for filing tax returns for companies with a turnover of less than HK$2m by removing the need for a statutory audit.
Most, if not all, of the recommended revisions to our tax system are based on a perceived need to maintain Hong Kong’s competitiveness. Reference is made to the World Bank’s report which places Hong Kong’s effective tax rate above the average for East Asia, Singapore, Taiwan, Korea and Malaysia.
Notwithstanding that, I question whether taxation is that important in the minds of CEOs and CFOs when a decision needs to be made as to the most favourable location for an Asian regional office. Other significant considerations are likely to include;
• Infrastructure
• Legal System
• Availability of Education
• Location
• Transportation
• Financial Services
• Quality and availability of the workforce
• Languages spoken
• Stability and convertibly of the domestic currency
• Cost of Living
As stated above I am yet to be convinced that taxation, and hence a reduction in the standard rate of profits tax, is likely to materially influence Hong Kong’s attractiveness as a place to establish an office. I would also raise the question as to which companies would benefit from a reduction in the standard rate of profits tax. In the year of assessment 2009/10 (the latest available statistics) 60% of those companies paying profits tax paid less than HK$25,000, whilst the vast majority of the profits tax collected was paid by a very small number of corporations. A two-tiered system, whereby a lower rate of tax would be payable by those companies with a low level of profit, would certainly benefit the majority without causing a huge loss in revenue by the Government. The implementation of such a proposal is unlikely to be an arduous task to either the Government or the Inland Revenue Department.
Equally, whilst there are numerous reasons to support the introduction of group relief and/or the carry back of tax losses this has been dismissed by past Financial Secretaries on grounds that such an amendment to Hong Kong’s tax legislation would diminish the Government’s revenues, over complicate the Inland Revenue Ordinance and open the door to tax avoidance. All these contentions can be easily refuted.
Sadly, very few of the General Public’s proposals are likely to be adopted. Notwithstanding that the level of reserves remains high, the latest statistics show that they are equal to 24 months of Government expenditure, and it is likely that the run of seven consecutive years of consolidated surpluses will not be broken in 2011/2012, the gloomy economic outlook for Europe and its effect on Hong Kong will provide the Financial Secretary with the weapon he needs to keep the purse strings tightly tied.
I sincerely hope that the Financial Secretary will not have to face another embarrassing situation, as he did in 2011, and be forced to significantly amend his budget in order to gain the Legislative Council’s approval.
