Policy Statement & Submission

THE HONG KONG GENERAL CHAMBER OF COMMERCE



PROPOSALS FOR THE 2009-10 BUDGET




A SUBMISSION TO THE HONG KONG SAR FINANCIAL SECRETARY,
THE HON JOHN TSANG CHUN-WAH, ON THE GOVERNMENT BUDGET
FOR THE FISCAL YEAR 2009-10

(1 APRIL 2009 TO 31 MARCH 2010).

"Damage Control"

This is by far the most difficult budget you will ever have to draft. Amid unprecedented financial turmoil and in the face of what may well be a deep and prolonged global contraction, we anticipate that our dangerously narrow tax base will return an overly large fiscal deficit for some time. While this is not the time to reopen consultations on broadening the tax base - a principle which we have strongly endorsed for many years - it is a reminder of the dangers of avoiding difficult and unpopular decisions during more prosperous periods.

For this year, we must set aside our worries over the longer term and focus on survival. Naturally, we have no doubt that Hong Kong will continue to be among the very best places to live and work, but we are deeply concerned that tens of thousands of companies, and their employees, are in immediate danger. This year, more than any other in recent memory, we need to focus on our smaller and medium-sized companies, for the sake of the businesses themselves and for their millions of employees here in Hong Kong.

Our SME backbone
It is difficult to predict market movements even a few days ahead, but one thing is certain: SMEs are dying for want of operating cash. Our concern is so great that we wrote to the Chief Executive in November urging immediate steps to ensure that as many as possible of our smaller companies survive to benefit from whatever stimulus arises from the 2009/10 Budget.

In that letter, we strongly pressed for an elimination of provisional taxes on both salaries and profits, a longer lead time for paying final Profits Taxes and a lower tax rate for SMEs. Eliminating the provisional tax payable on profits of under $5 million in 2005-06 would have resulted in the government collecting $8 billion somewhat later than usual. Surely the interest earned on this money, no more than $200 million, is a small price to pay for shoring up the cash flow of our SMEs.

In asking for a longer lead time to pay the final tax, we are seeking to keep healthy those firms that are still profitable, and that have the potential to contribute to the public purse for many years to come. Currently, a company in financial difficulty (and, we expect this category to expand sharply) may apply to pay tax by instalments, but at a cost. A 5% surcharge imposed on the balance of the tax payable, and a further 10% surcharge on any amount still remaining unpaid six months after the original due date is, in this environment, counterproductive. We would urge suspending this penalty, for two years.

Finally, there is the tax rate itself. We have long championed for the very low profits tax rate, and its limited applicability to business transactions. Fiscal authorities in other jurisdictions have taken notice, and are rapidly reducing rates to within range of our own. For SMEs, concessions available elsewhere make Hong Kong less attractive, and so we recommend establishing an effective tax rate of 10% on the first $500,000 of assessable income. The value small companies bring to Hong Kong in terms of employment far outweighs the meagre fiscal return such a business may generate. Once a company is on its feet, and building a viable presence, the standard tax rate may be imposed. In making this recommendation, we note that Singapore has a two tier tax system for SMEs which results in an SME receiving partial tax exemption on the first S$300,000 of income.
In FY2005/06, the 49,600 companies with taxable profits of less than $1 million paid $2.23 billion; those with under $5 million in profits - fully 90% of all tax paying companies - paid just $7.94 billion. We believe this is the time to invest in the SMEs that are the backbone of our economy. In the current economic conditions, it is very likely that contribution these companies make will drop significantly, thereby reducing government revenue. However, in the process of paying these taxes, some companies may need to lay off workers or even close their doors. Our recommendations are aimed at avoiding as many redundancies and bankruptcies as possible.


Benchmarking
In addition, the growing uncertainty as to what is taxable and what is not does nothing to enhance our attraction as a business and financial centre. At this time, when revenues are extremely tight and relief is badly needed, we should take the structural steps that will cost little yet add greatly to Hong Kong's competitiveness.

One of the most important pro-competitiveness issues under consideration is group loss relief. Our lack of group loss relief and loss carry back provisions continues to give Singapore and other jurisdictions a competitive edge. If the Profits Tax rate cannot be reduced to 15% immediately because of revenue concerns - which, given the previous budget, is difficult to believe - then it is all the more imperative that nonrevenue factors such as group loss relief and loss carry back be implemented without delay.


Economic Outlook for the Coming Year

The Hong Kong General Chamber of Commerce expects 2009 to be the single most difficult year in a generation. Not since 1974 have the US, Japan and Europe been in a synchronised recession. China is clearly slowing much more quickly than anyone realized, and new regulatory measures thought prudent just a few months ago are now being reconsidered. South-east Asia, Taiwan, Korea and other perennially robust economies are contracting. Consumer demand throughout the world is rapidly contracting and the prospects for a steep decline in world trade cannot be ignored. In this environment, Hong Kong will be lucky to record any real economic growth at all. The specific figures are laid out in the table below.

OUR VIEW OF 2009

Calendar Year (% change)	2007	2008 (e)	2009 (f)
Nominal GDP growth	+9.5	+5.0	+2.5
GDP Deflator	+3.0	+2.0	+2.2
Real GDP growth	+6.4	+3.0	0.0-1.0

(e) estimate (f) HKGCC forecast

For several years, we have benefited from the very strong growth in world trade and rich-market consumer demand. China's booming private sector added fuel to the engine driving our economy, and we prospered. Now, we will feel the chill as our exposed economy faces the full force of global winter. Just as we do not regret the good times, so, too, do we remain confident in our role as Asia's global business and financial centre during this challenging period.

Fiscal Considerations

Our recommendations for the HKSAR 2009/10 Budget fall into three broad categories. First, and obviously the most important of the three, are the emergency steps necessary for damage control. We see no reason for building up hundreds of billions of dollars in fiscal reserves if they are not now used, prudently, in our time of greatest need. The most pressing need is for cash flow to smaller companies, and that theme is repeatedly expressed in our recommendations. Without a lifeline, far too many of our SMEs will die, and take with them hundreds of thousands of jobs.

At the second tier are the measures that will lay the groundwork for a strong recovery. We look to our regional neighbours and global competitors and see a very real threat that our competitive offering is getting a bit long in the tooth. Carving away unnecessary business operating costs and slimming down our overly large public sector will be central to the quality and speed of our economic recovery. Measures such as group loss relief and loss carry-back, which will take a year or more to implement, need to be decided upon and drafted quickly. Areas where taxpayers are uncertain as to their obligations need to be clarified, so as to present a transparent business environment to the entrepreneurs and enterprises of the future.

Finally, there are longer-term matters, some of which we recognize will not be considered high priorities at this time. Over the course of the next upswing, we would fully expect that the structural weaknesses that have left us vulnerable will be addressed. Among the most dangerous of these are our overly narrow tax base, the excessive size of our public sector and the archaic nature of civil service human resource management. When your agenda clears, we will return to these themes.

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