22 January 2020
The Honourable Paul Chan Mo-po, GBS, MH, JP
25/F, Central Government Offices
2 Tim Mei Avenue, Tamar
Dear Financial Secretary
I am pleased to submit for your consideration the Hong Kong General Chamber of Commerce’s proposals for the Government’s forthcoming Budget.
The welcome message on your Bureau’s home website page states that “Financial stability is the key to a stable and growing economy that brings about improvements to people's livelihood.” We could not agree more. This message is all the more valid, against the background of the recent tumultuous and disruptive events in Hong Kong.
The social unrest has created considerable damage to Hong Kong businesses, with many having suffered severe financial losses, and even closed down. As it is business that has always been an important driver of Hong Kong citizens’ welfare, by creating job opportunities, and enhancing economic growth for the benefit of all, there are therefore justifiable concerns about the scope and scale of such challenges and their implications to the SAR.
With this in mind, we believe that this Budget provides a timely, and indeed crucial, opportunity to introduce a carefully-crafted set of measures to help set Hong Kong businesses on the path to recovery, thereby promoting the welfare of Hong Kong society generally.
Our recommendations as to what these initiatives should be, as well as other recommendations designed to enhance the welfare of Hong Kong citizens are set out in the attached submission.
We hope that you will find these helpful.
HKGCC Budget Proposals for 2020-2021
Hong Kong is fighting for its socio-economic survival as it contends with unprecedented external and internal challenges. Ongoing domestic unrest, along with geopolitical uncertainties, which include volatile US-China trade relations, are taking a heavy toll on the SAR.
In addition to the policy initiatives put forward by the Chief Executive in October, the Government has responded by rolling out a number of interim fiscal measures to help businesses, especially those affected by the social upheaval. These are welcome, but as matters have deteriorated further since, we believe that additional support is necessary to help businesses struggling to stay afloat.
Ultimately, calm and order must be restored through the introduction of effective and concrete solutions that are supported by the general community. There must be efforts to de-escalate conflicts through an inclusive dialogue with all stakeholders. These are important and fundamental to undoing some of the damage and paving the way for a lasting recovery.
Our recommendations on near-term measures are set out below. We also offer suggestions on instituting a tax environment that is conducive to and supportive of a quick rehabilitation of Hong Kong’s standing as a business-friendly city, assuming that the tumultuous events of recent months come to an end soon.
A. Immediate measures to ease cashflow
Reduced cashflow is a common malady faced by companies trying to cope with the challenging conditions in Hong Kong. To that end, we suggest that serious consideration be given to the following recommendations to provide businesses with much needed short-term relief as a matter of urgency.
B. Other short-term supportive measures
C. Forward-looking measures
Since 1994, liquor with an alcoholic strength above 30% has been taxed at 100% based on its declared import value. This is in contrast with other developed economies, where taxation calculated on the basis of alcoholic content is increasingly favoured. This has placed Hong Kong at an economic disadvantage whether as an international tourism hub or auction centre for premium spirits. According to the findings of a benchmarking exercise in January 2019, a reformed spirits tax could generate as much as HK$1 billion in additional benefits for Hong Kong’s economy in the first year of implementation.
We therefore call for a change in the manner that liquor is taxed. Instead of the existing approach as described above, products with an alcoholic strength of 30% or above should be taxed based on the alcoholic content regardless of their import price. This provides a more equitable, responsible and competitive tax framework for spirits and would also benefit a wide cross section of the local economy that include such activities as auctions, premium tourism, gastronomy and entertainment, luxury retail, conventions and education, and logistics. Such a change would also provide timely and much-needed relief to the retail and tourism sectors that are subject to extremely challenging operating conditions due to the China-US trade war and local unrest.
Although the super deduction introduced last year is welcome as a much-needed measure in bolstering R&D activities in Hong Kong, there are still a number of perceived shortcomings that should be addressed to make the enhanced arrangement more attractive and accessible to qualifying undertakings. Our recommendations are set out as follows:
a. Clarify Section 15F
i. Presently, it is unclear if royalty-deemed income received by Hong Kong taxpayers for R&D developments made before the introduction of the new legislation falls within the scope of the new enhanced deduction. In the interest of certainty, clarification should be given to the IRD’s implementation of the new law, including whether enforcement actions would only be taken if serious anti-avoidance was involved.
b. Widen the scope of qualifying activities
i. The existing standards on qualifying activities are excessively stringent. As such, these have the effect of disincentivising R&D investments. The narrow interpretation currently adopted should be reviewed to render the concession more useful and accessible across a wider range of activities.
ii. As the vetting of concession applications is a shared responsibility between IRD and the Innovation and Technology Commission, this could sometimes give rise to an impasse on decision-making thereby resulting in delays. An agreed mechanism such as an appointment of an arbitrator or mediator should be introduced to resolve deadlock situations, if and when a decision cannot be reached on an application.
c. Enhance transparency in approving claims
i. The legal provisions in the new law as it currently stands do not offer enough clarity and certainty for companies wishing to apply for such a deduction.
ii. We suggest that IRD emulate its Singaporean counterpart by publishing statistics on applications for super deduction, including information on successful and unsuccessful cases according to the type of activities. This would provide a useful benchmark and guidance for companies that are considering applying for the deduction.
d. Extend eligibility to Hong Kong companies in the GBA
i. We continue to call for the extension of the super deduction to include GBA-based subsidiaries engaged in qualifying R&D activities that are wholly-owned by Hong Kong companies.
ii. Such an arrangement would be consistent with the Government’s policy goal of extending and deepening Hong Kong’s involvement in the GBA initiative.
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