Like the rest of the world, Hong Kong continues to deal with the impact of the Covid-19 pandemic. At the same time, a global minimum tax initiative put forward by the OECD may impact the city’s competitiveness as an international business hub. Our recommendations to the Financial Secretary therefore focus on these areas, as well as other key issues that affect Hong Kong’s attractiveness as a place to work, live and do business.
Pandemic Relief
Enhance government support programmes: The emergence of Omicron has underscored the vulnerability of certain pockets of the economy, such as the travel, tourism and retail sectors. We suggest targeted support be provided to businesses affected by the recent tightening of social-distancing measures. Consideration should also be given to extending such support to businesses that are indirectly affected, such as suppliers and musicians.
Short term measures
Loss carry-back (LCB): We reiterate the call we made last year for the introduction of LCB to help businesses, especially SMEs, to recover on a solid footing from the losses incurred due to Covid-19.
One-time 100% tax reduction for profits tax, salaries tax and tax under personal assessment for the year of assessment 2021/22. We suggest that a similar reduction be given in all cases, subject to a ceiling of HK$20,000.
Consumption voucher: The initiative, which began in August, has contributed immensely to supporting the domestic economy. Another round of vouchers would help local businesses, especially the retail and hospitality sectors, which have been hardest hit by the pandemic.
Gradual tapering of relief programmes: We welcome the government’s decision in October to extend support schemes relating to export credit and the conference and exhibition sector. We suggest that other short-term government support schemes be reviewed periodically and, where appropriate, rolled back incrementally.
Prepare for BEPS 2.0
The adoption of a comprehensive agreement on 8 October 2021 on an Inclusive Framework on BEPS 2.0 represents a material and historic change to the taxation landscape. The following are the Chamber’s recommendations on this issue.
Reinvesting additional revenues
Consideration should be given by the government to a planned and systemic approach to reallocating the additional revenues raised as a result of the implementation of BEPS 2.0.
Recommendations: Consistent with the shift towards a global minimum tax rate of 15% as provided under Pillar 2 of BEPS 2.0, we suggest that a similar adjustment be made locally.To provide a balanced approach to the taxation of this group of taxpayers, consideration should be given to providing group relief on tax losses incurred as and when Pillar 2 is implemented.
Efforts should also be made to identify and address policy inefficiencies and bottlenecks to ensure Hong Kong lives up to its reputation as a business-friendly city through the adoption of Regulatory Impact Assessments.
Promoting Hong Kong
Competition across jurisdictions in a post-BEPS 2.0 landscape will be fought on non-taxation merits. Resources should be allocated to communicating Hong Kong’s advantages as an international finance and trade centre. Singapore has been proactively engaging stakeholders across the business spectrum through its Economic Development Board (EDB) to engage with and maintain interest from international businesses.
Recommendations: The government should look into setting up a dedicated office as a matter of urgency to ensure Hong Kong does not run the risk of a permanent loss of business. We would therefore suggest that the equivalent of Singapore’s EDB be established to assume responsibility for such tasks.
Judicious implementation
The Pillar 2 rules are anticipated to be brought into law in 2022 and take effect in 2023. In addition, the Undertaxed Payments Rule (UTPR) is expected to be implemented in 2024. In Hong Kong, for the authorities to collect tax from subsidiaries of MNEs under Pillar 2, a Domestic Minimum Tax (DMT) would be required. The Government had asserted that DMT regulations would mirror that for group tax, namely, these would all be set at 15% to align with OECD requirements.
Recommendations: We suggest that the DMT should not be rolled out before the introduction of UTPR in 2024. This would allow Hong Kong to observe the approach in other jurisdictions and learn from their experiences.
Exiting the EU’s Grey List
In October 2021, the European Union added Hong Kong to its Grey List, due to concerns over the non-taxation of certain offshore passive income. The government intends to amend Hong Kong’s tax legislation by the end of 2022, to enable the city to be removed from the Grey List.
Within the local business community, there are concerns about the government’s approach to dealing with Hong Kong’s longstanding source principle. More clarity is required on the status of the offshore regime, and on dividends as well as royalty and interest incomes.
As it appears the crux of the issue concerns double non-taxation, if a business was able to demonstrate that it had paid withholding tax overseas, this should be adequate in meeting the condition that tax payment has been made.
Recommendations: Clarity on whether dividends fall under the meaning of passive income is important because this income type is more prevalent compared to royalties and interests. Dividends are usually subject to tax at source and, as such, should not be taxed again.
Enlarge Hong Kong’s Tax Treaty Network
The number of double taxation treaties (DTAs) Hong Kong has entered into has remained mostly unchanged over the last 12-month period. Increasing Hong Kong’s DTAs is important if we wish to attract more businesses to set up regional headquarters here.
Recommendations: The government should set specific targets on the number of DTAs to be achieved over a predetermined period – we suggest a number between 20 and 30 within a five-year period.
Promote Maritime Businesses
In her Policy Address, the Chief Executive suggested that the government would introduce tax concessions to attract more shipping businesses. Our proposals to achieve this are:
′ Expand Hong Kong’s treaty network
′ Extend profits tax concessions to shipping-related services
′ Provide fiscal measures to encourage “green shipping”
′ Introduce fiscal incentives for maritime businesses operating in Hong Kong and the Greater Bay Area
Support the Retail and Tourism Sectors
Although conditions in the retail and tourism sectors have improved in recent months, the outlook continues to be fraught with uncertainty as a result of the continuing restrictions on cross-border travel. Our recommendations are:
Economic and policy support
′ Launch a scheme similar to the SingapoRediscover Voucher Scheme to stimulate spending on local tourism in Hong Kong
′ Allow foreign labour to be imported to take up specialist or lower end positions
′ Lower the threshold for the Convention and Exhibition Industry Scheme, which is currently only applicable to large-scale events
Business Digitization
′ Encourage e-payment providers to reduce fees payable by merchants
′ Support digitization in the retail and tourism industries
′ Simplify the application process for government funding for the adoption of technological upgrades
Eco-tourism
′ Promote the development of eco-tourism by promoting lesser-known places in Hong Kong
Synergies with the Greater Bay Area (GBA)
′ Explore prospects for multi-city GBA tours that include Hong Kong, including cruise ship itineraries
Sustain the Logistics Sector
As a pillar industry and key contributor to GDP and employment in Hong Kong, the logistics sector plays a critical role in our economic well-being. Our recommendations to maintain the sector include:
Labour – Policy support is needed to help the sector recruit labour and enable the importation of foreign workers.
Land – There is currently an acute shortage of warehouse space for the logistics sector. It is therefore recommended that adequate supply of land be designated for commercial storage purposes.
GBA – To facilitate the movement of goods within the region, we suggest implementing policies that support cargo movement via the Hong Kong-Macao-Zhuhai bridge.
Green Logistics – In addition to the “greening” of private vehicles, efforts should also be made to do the same for commercial vehicles such as trucks and vans. We suggest providing incentives for industrial and warehouse owners to install a charging network and other electrification provisions.
Compete for Global Talent
As with other economies, Hong Kong is facing an ageing labour force and worker shortages.
Recommendations: We suggest introducing a programme similar to the United States’ H-1B, a non-immigrant visa that allows foreign workers to live and work in the country for up to six years, after which they can apply for a green card.
We also suggest reviewing the salaries tax to identify ways to enhance Hong Kong’s attractiveness as a place to work. In contrast to the limitations imposed by BEPS 2.0 on corporate taxation, this is a policy area where the government can still exercise full fiscal control.
In addition, more resources should be allocated to the Labour and Housing Departments to broadcast grassroot employment opportunities in local districts.
Leverage on Public Private Partnerships (PPP)
As noted by the World Bank, delivering infrastructure projects is challenging for the public sector. The government should be open to involving the private sector in projects such as the Lantau Tomorrow Vision and the Northern Metropolis Development Strategy, to allocate risk and optimize project delivery in a cost-effective manner.
Position Hong Kong as a centre for IP-backed financing
Intellectual Property (IP) such as patents, trademarks and copyright are assuming greater importance as companies increasingly recognize the importance of innovation. The emergence of IP-backed debt financing provides an attractive and low-cost alternative for IP-rich companies to monetise their intangible assets.
Recommendations: We suggest that the government review the current IP laws to create a legal environment that is conducive to the conduct of IP-backed debt financing.
It should also support start-ups and early-stage companies in commercialising their products or services, and nurture local talent through university programmes that include courses on IP-related issues.