Since the last Budget Address, the economic situation in Hong Kong has been characterized by increased uncertainty, with the Covid crisis wreaking havoc on the city.
Immediate attention must be given to mitigating the devastating effects of the coronavirus. At the same time, we are also mindful of the need to transform Hong Kong’s operating environment into one that is more sustainable and resilient under the “new normal.”
As the number of local cases continues to ebb and flow, businesses are struggling with a protracted period of uncertainty that has witnessed a dramatic and unprecedented shift in the business landscape. In the near term, the roll-out of relief measures under the Anti-Epidemic Fund has provided some respite and we urge the Government to continue with such support programmes. To this end, we suggest:
Extending the Employment Support Scheme (ESS) and Distance Business (D-Biz) Programme for another quarter or until an effective vaccine is made available. This would help alleviate job losses in the case of ESS and facilitate digitization in the case of D-Biz. Continuity with such fiscal support is important, as pointed out in the latest OECD Economic Outlook, especially for many SMEs that are the main drivers of job creation. We also agree with the OECD that “policy action should become better targeted to where it is needed most and to strengthen the recovery.” In that regard, we urge the Government to extend its support measures but in a targeted manner to help SMEs, especially those in the food and beverage, travel and tourism, lodging and recreation, and arts and entertainment sectors.
Suspend MPF contributions for three to six months. This could either be applicable to all employees or limited to those with incomes or MPF contributions below a certain amount. This would be especially helpful to low-income employees in sectors that have borne the brunt of the coronavirus and who have suffered from substantial cuts to their take-home pay.
Waiving the provisional tax for the 2020/21 assessable period, and expedite tax refunds. These measures would all help reduce the burden on taxpayers, which would in turn alleviate cashflow difficulties. We suggest drawing up a well-defined timetable for processing such refunds so that these are able to provide meaningful support to taxpayers.
Providing a Tax Rebate for the 2019/20 Financial Year. Cashflow is one of the key challenges now facing many firms that are struggling to stay afloat. By providing a rebate, this would throw companies a critical lifeline that could mean the difference between remaining in or going out of business.
Reducing profits and salaries tax rate by 1% for a year. A tax cut would send a strong message to the markets and provide a much-needed boost to confidence, even if the duration of such a reduction is only for a limited period. The cost arising from the revenue foregone would be more than offset by the likely benefits arising from the stimulative effects associated with such a measure.
Introducing Loss Carry Back (LCB). The introduction of LCB is timely as businesses in general are suffering from losses as a result of the effects of COVID-19. We suggest that this be implemented for a finite period during which companies can make LCB claims subject to a cap of between HK$2 million and HK$3 million in losses for the 2019/20 and 2020/21 periods.
Issue government debt to preserve fiscal strength
A recurring and challenging issue for Hong Kong is its narrow tax base. As consideration is given to identifying new and sustainable sources of income, we suggest that the Government consider the issuance of treasury bonds as an alternative means of raising funds. The Financial Secretary’s comments last year on issuing infrastructure bonds to pay for new projects is therefore welcomed by the Chamber. In addition to easing the pressure on our fiscal reserves, the issuance of government bonds would also strengthen Hong Kong’s capital markets and our standing as an international financial centre.
Deepen the long-term Hong Kong Dollar-denominated bond market
As Hong Kong’s population ages, the sustainability of the public’s financial future has become even more important, especially with the current economic challenges. To reduce social dependence on the Government, there must be efforts to deepen the long-term saving and retirement income markets in Hong Kong. Hong Kong insurers are presently unable to provide adequate long-term Hong Kong Dollar denominated savings plans to residents due to the absence of a long-term Hong Kong Dollar bond market. To rectify this, we recommend deepening the long-term Hong Kong Dollar bond market through the (i) issuance of 30-year government debt; and (ii) introduction of fiscal incentives to Hong Kong-domiciled corporations issuing long-term bonds.
Promote Green Finance
We welcome the measures unveiled by the Chief Executive in her recent Policy Address to enhance Hong Kong’s performance in achieving carbon neutrality before 2050. Promoting Hong Kong as a leader in green finance is a logical initiative given our standing as an international financial centre, and in view of the growing importance of addressing climate change. The Government should also consider expanding the existing green bond programme as an alternative to financing green public projects through its Capital Works Reserve Fund.
Strengthen the Tax Policy Unit (TPU)
We continue to call for an upgrade of the TPU as a matter of urgency so that it is better able to achieve its mission of enhancing Hong Kong’s tax competitiveness. A well-resourced and well-staffed TPU should assume the primary responsibility for reviewing and making recommendations on policies of a fiscal nature. Such an approach to the division of labour would allow the Inland Revenue Department to concentrate on policy administration.
Conduct a Comprehensive Review of Hong Kong’s Tax System
The OECD’s BEPS 2.0 proposal to tax the digital economy and introduce a global minimum tax could have major implications on Hong Kong’s tax system, especially its preferential tax regimes, and multinationals. We suggest that the Government take the opportunity to conduct a comprehensive review to modernise our tax code.
Incentivise the establishment of regional headquarters (RHQs)
Although we remain an attractive business destination, we should be mindful of the need to maintain our comparative advantage as a preferred gateway into the burgeoning Mainland market. Given that corporate treasury functions are typically operated through RHQs, and there is already a corporate treasury centre regime under which pre-defined activities enjoy a concessionary tax rate of 8.25%, we reiterate our call to extend such a concession to RHQs to enhance Hong Kong’s appeal.
Expand Hong Kong’s network of Comprehensive Double Taxation Agreements (CDTAs)
We commend the Government for its efforts to actively pursue CDTAs with Hong Kong’s trading partners and are pleased to note that there are 45 such agreements as of October 2020 with a further 12 under negotiation. This is conducive to our recommendation on attracting more RHQs to Hong Kong, given the benefits associated with a larger network of CDTAs.
Conduct a Comprehensive Review of Hong Kong’s MPF System and Retirement Policy
There have been incremental changes made to Hong Kong’s MPF system since its launch 20 years ago. Although these are welcomed, more substantial reforms are needed. This is because along with an aging population and increase in life expectancy, there is even greater urgency to address lingering issues such as adequacy of investment returns, and the ability or incentive to contribute more, if the funding of retirement needs is to be met. Efforts should be made to bolster contributions so that Hong Kong’s replacement rate, which currently stands at around 40%, is on par with the OECD’s average of 60%. The offset mechanism should also be reconsidered as part of such a comprehensive review.
Streamline the Advance Pricing Arrangement (APA) Process
Hong Kong should streamline the APA application process so that this can be completed within three months, which would be on par with the time taken in Shenzhen. This streamlined APA could then be extended across the GBA to provide certainty to taxpayers and facilitate commercial activities within the region.
Mitigate effects of amendments to DIPN 28
The Government’s unilateral decision to make substantive changes to DIPN 28 without forewarning and consultation has introduced unwanted and unnecessary uncertainty to the tax environment in Hong Kong. We suggest that unilateral tax relief be granted to taxpayers affected by the revision.
Expedite the adoption of Industry 4.0
The pandemic has brought into sharp relief the urgent need to accelerate the adoption of Industry 4.0 in Hong Kong. Although the Government has set up a funding mechanism to encourage the resurgence of new pillar industries, more policy support is needed. This includes reviewing land use to ensure that the regulatory framework can support those companies considering the establishment of high value-added production lines in Hong Kong as the availability of industrial stock gradually declines. The opportunity should also be taken to review dated legislation that could curtail interest in such investments. This would contribute to the diversification of Hong Kong’s economic base and create jobs beyond the services sector.