CEO Online

A New Era of Low Tax?

Various sectors of the community have been enthusiastically discussing different policies recently. On economic issues, we all agree that Hong Kong needs to implement measures to stimulate the economy and create job opportunities. Many critics have noted that Hong Kong can drive economic growth by enhancing the tax system, which I strongly support. In fact, the Chamber has long lobbied the Government to introduce various new measures to enhance our tax competitiveness. For many years, we presented our proposal for introducing a two-tier profits tax system and have been actively engaged in discussions with Government about its feasibility. I am happy to hear that some candidates running for Chief Executive have adopted our proposal in their election platforms.

As a preferred business destination, Hong Kong’s simple and low tax regime is undoubtedly a major reason why we attract so many investors. Looking around the world, low tax rates have become a trend. Since Donald Trump announced plans to reduce the United States’ corporate tax rate from 35% to 20%, many people believe that such a profound cut would deliver a hard blow to many countries around the world, and will likely lead to a global wave of tax cuts to attract investors.

While it is difficult to say at this moment exactly how much the Trump Administration will cut corporate taxes, some European countries and Japan are planning for, or have already put in place, lower corporate tax rates to encourage local companies to stay and grow, as well as attract foreign enterprises to open businesses in their countries.

The global economy is changing and Hong Kong must be prepared to contend with such changes. Otherwise, our business environment will lose its competitiveness. Currently there are about 320,000 SMEs in Hong Kong, accounting for over 98% of all businesses, which are the lifeblood of our economy. For many years the Chamber has been urging the Government to introduce a simple and competitive tax structure that changes the current flat-rate profits tax to a two-tiered one. Our idea is to reduce the rate imposed on the first $2 million of taxable profits to 10%. We believe reducing the tax burden will help businesses, in particular SMEs, reinvest that money in their business, which in turn will benefit our economy.

Our proposal of capping the first tax band at $2 million of taxable profits is simple and clear, without complicating our tax system or narrowing of the tax base. 

Though the two-tier profits tax system will reduce Government revenue, we think the benefits should offset the loss. Assuming that the two-tier tax system were adopted, the estimated loss in income would be $4,535 million, approximately 3% of the total profits tax income, based on 2014-15 figures. We think the amount forgone should be offset by the benefits of the two-tier system because businesses can save some tax for further investment. This would result in an increase in business activities and job opportunities.

On the other hand, we hope the Government can offer tax incentives to diversify the economy. The innovation and technology industry is a new area of economic growth for Hong Kong, but the amount invested in R&D, which accounts for 0.76% of GDP, is low compared to other international cities. We propose consideration be given to a tax incentive granting 200% super tax deductions for expenditure incurred on R&D activities to encourage more businesses to invest more in R&D.

Posted on 2017/02/14