The Hong Kong General Chamber of Commerce is pleased to offer its policy priorities and recommendations to the Chief Executive (“CE”) for consideration in his Policy Address, and to the Financial Secretary for inclusion in his 2013/14 Budget.The Chamberappreciates the Administration’s determination to introduce new policies for the betterment of Hong Kong, and is eager to work hand in hand with the Government to enhance the continued prosperity of our city. In our view, the Government needs to formulate a clear vision for Hong Kong for the next 10-20 years, and adopt a strategic approach to establish our leading position within China as well as the rest of Asia. The aim for the Government should be to support and sustain national goals while maintaining our international standing and competitiveness.
2. As pointed out in our policy submission to the incoming CE earlier this year, the two areas where the Government should act quickly and aggressively are competitiveness and sustainability. We also encourage carefully thought-out planning and coordination, including proper regulatory and economic impact assessments that will help to break down silos among Government bureaux. We offer below our specific recommendations for your consideration.
Regulatory impact assessment
3. A proper functioning market does not require recurring government intervention. We are deeply concerned that in recent years the Government seems to legislate whenever there is a perception that the market mechanism is not working. Increasingly, regulations are being put in place where they would restrict legitimate business activities. It particularly worries us that the consultation procedure has not been as thorough as we would wish. Consequently, the impact on selected aspects, stakeholders or sectors of the economy is not given full consideration in the policy formulation process, resulting in substantial resistance to implementation. This is what the Chamber has been advocating for quite some time: a comprehensive regulatory impact assessment, before the introduction of every single piece of new legislation. Not simple pros and cons analysis, but analysis of all facets of the policy, the cost of compliance and the impact on business and other interested parties. Such assessments should address the concerns of related policy bureaux, and give equal weight to non-legislative options and alternatives.There needs to be a thorough consideration of the possible unintended consequences. The assessment should be conducted in a transparent manner, consulting stakeholders at appropriate junctures.
Clean up our air
4. In a recent paper submitted to your Administration, the Chamber proposed some concrete actions to clean up our air. Our proposal primarily involves adopting a combination of subsidies and mandatory requirements to get dirty vehicles off the road. We appreciate that the Government has similar incentive schemes in subsidizing retrofitting and/or replacing polluting vehicles. Nonetheless, lacking disincentives, such programmes have not been successful. Another major culprit of our dirty air is emissions produced by polluting vessels. Encouraging the switch to ultra-low sulphur diesel, simplifying the application procedure for subsidies for switching and tightening emission control on ocean-going vessels are some of our proposed measures. Also, the “lead-by-example” role played by the Government is very important since it is a major user of vehicles and vessels.
Population policy and talent development
5. The competitiveness of Hong Kong,which lacks valuable physical resources,has been primarily based on our single most valuable asset: human resources. To remain competitive, a key longer-term policy priority is for us to develop our talent from a very young age, keep them in town, and attract talent from outside so as to expand the entire pool. A sustainable environment with clean air, a good education system and better career opportunities will provide the nurturing soil essential for talent to grow. Competitiveness and sustainability are closely intertwined. Sustainable and competitive human resource strategies should be backed by a comprehensive population policy which covers talent cultivation, healthcare reform, retirement planning, and balancing housing supply and demand. Similarly, there is the need to acknowledge and recognize the importance of innovation in driving growth.
6. We agree with the Government’s notion of establishing a safety net for the needy, and that is why we support the introduction of the old age living allowance as well as other related measures. Public money should be deployed for worthwhile causes to promote our competitiveness, such as providing more international school places, and setting up a dedicated fund for healthcare and public pensions. Our large fiscal reserves should provide a comfortable cushion. On the other hand, the Government has the responsibility to keep expenditure within the limits of revenues and to achieve a fiscal balance. Otherwise, our future generations will suffer.
7. Our city’s educational system has undergone a series of changes in medium of instruction, curriculum and the like. During this time, we have seen a measureable decline in linguistic capabilities and overall attitudes toward work. More, the Government does not appear willing to support quality international English language education. The eventual cessation of funding for the English Schools Foundation is a case in point. The overwhelming desire of local families to provide better education for their children further exacerbates the already dire shortage in education places for international families. As a result, many are forced to reconsider contributing their talent to our labour pool. Our city’s international character is a key competitive advantage, but it requires investment. Immediately, the Government needs to facilitate the expansion of existing international schools, particularly at the primary level. At the same time, we must ensure that the quality of our local education produces graduates who befit Hong Kong’s character as a world class international city.
8. The Mandatory Provident Fund (“MPF”) system is widely acknowledged as not able to satisfy our retirement needs. While we applaud the Mandatory Provident Fund Schemes Authority’s recent efforts to improve the MPF System, primarily through driving down MPF fees, it may require a more thorough study and comprehensive consultation among stakeholders to decide the best way forward for the people of Hong Kong.
9. Shortagesin the labour market have produced near full employment, and led to long working hours. Small and medium enterprises (“SMEs”)have been under enormous pressure to deal with such labour insufficiency. The statutory minimum wage has not helped the situation, and the proposed regulations on working hours could be the final straw that breaks the camel’s back, especially when the global economy is expected to deteriorate in the next few quarters.The concept of standard working hours would introduce unhelpful rigidity to a highly developed service economy where there can be no ‘standard’ definitions. Legislating working hours would undermine the basic work ethic fundamentals that have enabled Hong Kong to thrive.
10. Labour shortage has affected various sectors of the economy, driving up labour cost and ultimately prices of goods and services. Particularly in the construction industry, with various projects in the pipeline, demand for labour has escalated dramatically. Contractors will protect themselves by building in additional cushion in the prices they tender for new contracts, multiplying the labour cost impact and translating into property price hikes. The Government should seriously consider viable solutions to this problem, including labour importation.
Long-term land supply
11. High home prices have long been a fact of life in Hong Kong, as they are in New York or London. The insufficient land supply and slow rezoning of old industrial areas have together skewed the market. The ultimate solution would be for the Government to produce a comprehensive land supply roadmap, laying out detailed supply for various uses in the long, medium and near terms. Once the market understands that a steady stream of development land is coming, the better predictability would help spread out housing demand and keep prices stable. Similar to the soaring trend of home prices, commercial rentals have jumped to such a level that the cost of doing business for commercial property occupiers (both office and retail) has been damaging. Escalating commercial rentals have particularly hurt small businesses which are running on very thin profit margins. High commercial rentals are the result of insufficient supply. The Government should identify potential growth areas and devise a carefully crafted master plan for commercial property development.
12. It is not clear if any proper regulatory impact assessment wasconducted before the Government announced the new stamp duty measures at the end of October (and, for that matter, the one implemented last year). We are all concerned that soaring property prices may put home ownership out of reach of ordinary citizens. Nonetheless, when and by what measure will the Government determine that the normal level of prices has returned, so that the measures may be relaxed? When it is necessary to impose extraordinary measures, they should have measurable objectives and be tightly restricted to a specific period of time. The current policy may force more families who would have preferred to own their own homes into the rental market. This pushes up rentals and has the effect of supporting high prices. The Chamber is also concerned that these special measures could have the unintended effect of shifting speculative investment interest to commercial and retail premises which are already suffering from very tight supply.
13. Moreover, local companies who acquire properties to generate long-term rental income will be seriously affected, and the punitive measure against foreign buyers will hurt our standing as a free market economy. A side effect is that such policies will slow the acquisition of poor quality properties for redevelopment, thereby preventing the upgrading of our housing, retail and commercial stock.
Regional integration and economic development
14. Our members have noted a more muted level of support for the long-held principles defining the roles of the Government and the private sector that may undermine Hong Kong’s image. A reiteration of the commitment to the concepts of “big market, small government” and “market leads, government facilitates” would go a long way toward alleviating this concern. Hong Kong thrives under a light regulatory touch and a strong entrepreneurial spirit, and looks to the Government as an enabler more than a manager.
15. Our city is the world’s third most important international business and finance centre, the preeminent operations centre in the Asian half of the world and the most international business hub in China. We need to balance the demands associated with each role so as to ensure continued strength not only globally and regionally, but also nationally. We need to support and sustain national goals while maintaining our international standing and competitiveness. Underlying all of these interests, from global to national, is the need to recognize and nurture our knowledge-based industries, that means preparing our young people for the kinds of work that will support not only themselves and their families, but also Hong Kong’s future.
16. We are a small, open economy with few natural resources. It goes without saying that Hong Kong should contribute to national integration and development. At the same time, we should not neglect our global ambitions. The most obvious area for further attention is in the financial markets, including continued development of the domestic bond market, adoption of globally accepted regulatory standards and encouragement for new products, such as Islamic financing.
17. Regionally, we must continually develop our ties to neighbouring economies, including – but not limited to – Mainland China. While the opportunities available north of the boundary are undeniable, we should remind ourselves of the international role Hong Kong has, and will continue to play. That is why we are concerned that Hong Kong may be left on the sidelines if we are not part of the regional arrangements. The China-ASEAN Free Trade Area is a prime example, and one that needs immediate attention. When non-participation in the free trade agreement means transshipment between ASEAN and China are less competitive, or when the absence of a double taxation agreement raises the cost of doing business, Hong Kong loses. We look to your Administration to pursue these urgent matters with Beijing so that we may continue to prosper from the strong linkages with emerging Asian economies.
18. Companies operating in the international arena tell us that they would wish for more, and more active Economic and Trade Offices (“ETOs”), and we agree. The Chamber strongly supports the trend toward establishing more ETOs in the Mainland. However, there are few new ETOs being established in Southeast Asia or other markets that will be critical to our future international development. We believe a priority list of new business support offices should be drawn up, with the intention of moving quickly to expand our global network. In addition, such offices should be tasked with the duty to attract investors from overseas to invest in Hong Kong, since we are investing much less in this regard compared to our competitors.
19. We are encouraged by the CE’s election pledge to devote more attention and resources to Hong Kong’s economic development, especially with regard to the maritime and logistics industry. As a major contributor to our GDP, the industry has been overlooked of late, despite being one of Hong Kong’s pillar industries. We believe that the Transport and Housing Bureau should delegate sufficient authority and resources from within to oversee this important sector of the economy, so as to create a ‘champion’ able to understand and articulate the sector’s needs and concerns. We also look forward to the publication of the consultants’ reports on sustaining Hong Kong as an international maritime centre, and in working with the Administration on the proposals put forward.
Reliefs for SMEs
20. As the external environment is getting tougher and competition keener, the Chamber believes that resources should be spent on areas benefiting the large population of SMEs which do not have the same deep pockets as major corporations. Accordingly, research and development (“R&D”) initiatives such as the recent launch of the Dedicated Fund on Branding, Upgrading and Domestic Sales are where the Government should invest. To facilitate the development of a research culture and to encourage technology development among Hong Kong enterprises, the Government should consider relaxing the requirements of the Research and Development Cash Rebate Scheme, allowing eligibility of the 30% rebate for in-house R&D projects and business partnerships with technology companies beyond the designated local research institutions, so as to catch up with the fast changing business environment. Anticipating tougher time ahead, the Government should consider further enhancing the SME Loan Guarantee Scheme and other SME financing schemes.
21. The Chamber believes that instead of burdening businesses with more regulations,the Government should consider ways of assisting businesses to ride out the storm. Given that Hong Kong lacks a large domestic market, low-cost labour and inexpensive land, our effective tax rate is too high. We propose immediately reducing the Profits Tax Rate to 15% and instituting a two-tiered system whereby the first $2 million of taxable profits are assessed at 10%,allowing SMEs to pay less. We can afford to invest our fiscal reserves in the future of our SMEs, and this is the way to do it.
22. Simplifying the auditing and reporting requirements for SMEs, thereby reducing their non-tax cost of compliance, is another way to relieve their burden. The Government should amend the Companies Ordinance so that incorporated SMEs can dispense with the audit requirement and, at the same time, revise the Inland Revenue Ordinance to allow smaller companies to file a very simple profits tax return document. At present, the only tax concession afforded to a ‘small corporation’ (defined as one whose gross income does not exceed $2 million) is that it is not required to attach the audited financial statements to its annual tax return; but it is still required to prepare and retain such documents. If such documents are not needed, there is no reason companies have to waste time on unnecessary paperwork.
23. Businesses need adequate cash flow to make ends meet. When the Government has an embarrassment of riches, affording our SMEs a few extra months in which to pay what they owe just makes sense. Therefore, extending the time in which companies may pay the final Profits Taxes owed, without penalty or interest, is a no-cost way to encourage our SMEs to grow.
24. Another temporary measure beneficial to SMEs would be to suspend collection of all kinds of fees for licences. Companies, and individuals, pay these fees regardless of their financial circumstances. Since the Government does not need the money, we propose a one-year exemption for business-related fees, driving licence fees and other levies not related to safety, public interest or environmental protection. To this list we would add all fees and charges related to education for children up to the secondary level. We would also suggest eliminating charges associated with advanced tax rulings.
Tax depreciation for capital equipment used outside Hong Kong
25. Many Hong Kong companies purchase plant and machinery (“P&M”) and make them available to manufacturing operations in Mainland China at no charge. Under Section 2 of the Inland Revenue Ordinance, P&M involved in such an arrangement is regarded as ‘leased’. These companies are not entitled to claim any tax depreciation because the equipment is used wholly or principally outside Hong Kong. To assist both large and smaller manufacturers struggling to hold down costs and compete in global markets, the Chamber proposes extending the same concession for contract processing cases to subcontracted manufacturing arrangements. We note that the issue has been raised in the Legislative Council in recent months and would like to continue to appeal for a review in the interest of Hong Kong’s long-term competitiveness.
Eliminating tax on domestic bonds
26. For companies seeking shelter from the ongoing global financial storm, the local bond market is an unattractive option. This is because, with the exception for certain qualifying debt instruments, Hong Kong taxes income from bonds where funds, are raised domestically. Meanwhile, interest income from offshore bonds is not taxable in Hong Kong. Aside from undermining the development of our bond market, it encourages companies either to move capital out of Hong Kong or to invest in other areas, such as real estate. Amending this counter-productive penalty on the local bond market might be part of an overall strategy to absorb excess liquidity and reduce pressure on real estate prices. The Government should eliminate the tax on domestic bonds.
Loss carry-back and group loss relief
27. Group loss relief and loss carry-back measures should be introduced as soon as possible. The fiscal implications are trivial and we already have more than sufficient anti-avoidance legislation (under Inland Revenue Ordinance Section 61A) to discourage cheating. In order to remain competitive with our neighbouring jurisdictions which all have similar measures in place, the Government should introduce these measures immediately.\
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