In its latest recommendations to the upcoming Budget, the Chamber has called on the Government to introduce a raft of short-term relief measures as well as schemes to
retain and acquire talent and promote Hong Kong’s tax competitiveness. Here is a summary of some of the key points in the report.
The Chamber suggests that the Government introduces the following short-term measures:
- Another round of consumption vouchers of no less than HK$5,000 per eligible recipient
- Continue to provide rent/rate rebates, although measures should be more targeted to assist owner-occupiers
- Extend the Principal Payment Holiday Scheme and the SME Financing Guarantee Scheme
- 100% rebate on profits and salaries tax with a raised cap of between HK$20,000 or HK$25,000
Retaining and attracting talent and businesses
Talent – A multi-pronged approach is needed over the immediate term to stem and reverse the exodus of local talent. One of these include providing tax relief such as raising child/dependent allowances and granting subsidies to working mothers. The Government should also conduct a survey to gauge market gaps for in-demand skills, for which re-training subsidies could be provided.
Single Family Office (SFO) – To attract more family offices to set up and operate in Hong Kong, consideration should be given to expanding the scope of qualifying assets to include those such as overseas immovable assets, collectible assets including art pieces, antiques, classic cars, wine and crypto assets.
Regional Headquarters (RHQs) – To encourage the return of international businesses to Hong Kong, we suggest that the Government provide finite concessions such as a three-year tax holiday to RHQs that were previously based in Hong Kong. Priority should be given to attracting major enterprises to set up in Hong Kong, as this would have the positive knock-on effect of compelling other companies in the formers’ supply chain to follow suit. Top-tiered firms from the Mainland should also be targeted as part of the GBA blueprint and the National 14th Five-Year Plan.
GBA Tax Incentives
R&D Super Deduction – Currently, businesses in Hong Kong can claim 300% in tax deduction for the first $2 million for eligible R&D expenses and 200% for the balance, which is quite attractive. However, access to such a concession can be onerous, as qualifying R&D activities must be carried out in Hong Kong. We suggest that the geographical conditions for granting super deduction be broadened beyond Hong Kong to also include R&D activities carried out in the GBA.
1 + 1 year tax holiday – The SAR Government should engage with the relevant Mainland authorities to explore the possibility of instituting a “1+1 year tax holiday” (i.e. 1 year of exemption from corporate income tax (“CIT”) followed by another year of 50% reduction in CIT) for Hong Kong domiciled companies with investments or considering investing in the GBA.
The Government has committed to streamlining administrative processes by setting up various task forces to review and remove bottlenecks and reduce bureaucracy. This should include taking stock of existing legislation to ensure that it continues to be relevant and not overly intrusive. To that end, we reiterate calls for the adoption of regulatory impact assessments so that Hong Kong can reclaim the mantle of the best place to do business.
Intellectual Property (“IP”) Trading Hub
The Government should review the existing tax regime on IP, with a view to allowing the amortization of capital expenditures incurred on intangible assets such as spectrum utilization fees, indefeasible rights of use, licence rights and franchise rights, that have a finite useful life and are used in running a business, by deeming these as deductibles.
Freight and logistics
Comprehensive tax treaty network – Continued efforts should be made to expand Hong Kong’s tax treaty network to allow locally-based shipping groups and aircraft lessors to better manage their tax exposure elsewhere. A larger treaty network offers tremendous benefits to international shipping groups and aircraft lessors, who are more likely to establish a presence in Hong Kong.
Green measures – Appropriate fiscal measures could be considered to support green shipping and aviation. This includes such support as tax credits to help offset the cost of substituting traditional aviation fuels with sustainable jet fuel, which would contribute immensely to strengthening Hong Kong’s competitiveness as an international aviation hub and creating job opportunities.
Electric Vehicles (EVs)
To encourage the electrification of mass market transportation, we recommend that a subsidy be introduced for each conventional taxi that is replaced by an electric one. The subsidy can be administered via the New Energy Transport Fund-based revised conditions.
We also recommend that the Government extend the current first registration tax (“FRT”) concession for EVs until 30 June 2027, as well as the special tax arrangement for enterprises to claim 100% deduction on capital expenditure for EVs made in the first year of procurement.
Enhancements should be made to our REITs regime to render it more attractive for the listing and trading of such an asset class by raising the grant ceiling under the Grant Scheme for REITs, which currently applies to SFC-authorized REITs with a minimum market capitalization of HK$1.5 billion.
Tax Competitiveness – Hong Kong has hitherto lacked a dedicated government agency to oversee and formulate tax policy. Although a Tax Policy Unit was established in 2017 (and since retitled as the Budget and Tax Policy Unit (“BTPU”)), it continues to be under-resourced and lacks a mandate. To promote Hong Kong’s tax competitiveness and provide clear policy direction, investments in the BTPU should be made to enable it to discharge its responsibilities effectively and properly.
Tax Certainty – Hong Kong operates on a “pay first, assess later” regime and applies a 6-year statutory assessment period. However, the statute of limitation does not apply to taxpayers with tax losses and tax exempted positions. Furthermore, the prevailing practice of self-assessment has the effect of deterring investors from applying for tax concessions due to the lack of certainty. We also note that this has given rise to numerous cases of tax disputes and appeals, which could sometimes take 10-20 years to resolve.
Compared to the statutory period of 3-4 years in other Asian jurisdictions and the UK’s one-year enquiry period, consideration should be given to (1) establishing a pre-approval arrangement for tax concession regimes, especially in the case of the impending FIHV tax exemption regime, which are important to maintaining Hong Kong’s status as an international financial centre, and (2) shortening the statutory assessment period and / or review period to better align with practices elsewhere to enhance Hong Kong’s tax competitiveness.
Compliance Burden – It is imperative that Hong Kong take active and concrete actions to refashion itself as a place in which it is easy to do business. In that regard, we suggest that the Government adopt a flexible approach to providing relief to businesses as in the case of the foreign-sourced income exemption (“FSIE”) regime, which came into force on 1 January, 2023.
Government support schemes – An entity similar to Singapore’s Economic Development Board could be established in Hong Kong, with the KPI of attracting certain investment types based on a number of quantifiable parameters.
Raise financial literacy – The Government should raise the level of financial literacy in Hong Kong by providing the requisite resources to schools, universities and other relevant institutions, and promote public education through information campaigns to raise awareness on the importance of having adequate retirement savings.
Make MPF meaningful and relevant – The 10% mandatory contributory ceiling currently applicable to both employers and employees falls short when benchmarked against the OECD’s average of 18%. Although additional contributions of a voluntary nature are allowed and are encouraged, the MPF’s one-size-fits-all design fails to take into account the ability or willingness of the different population segments of society to contribute. The Government should also consider doubling to 10% the threshold on contributions for employees and self-employed persons as and when the e-MPF platform is rolled out.