Hong Kongis a place that many consider among the freest in the world. We don’t tax dividends, interest or capital gains and rejected the notion of a taxing goods and services. Few incentives are offered to companies or consumers, and as a result, less money is needed to provide government services. That, in turn, helps keep taxes low, which contributes to our reputation as one of the best places to do business in the entire world.
Perhaps because of this, Hong Kong is home to over one million companies, which by simple mathematics tells us that the vast majority of them are very small. For these companies, cash flow and a minimum of red tape are life-and-death issues, especially when the global business environment is as tough as it has been in recent years.
We tax profits at a 16.5% rate, which in the 1990s was considered pretty low. When other governments were quick to charge 30% or more, we looked good. But, times have changed, and so must we.
Our competitors have slashed taxes and offered incentives to attract business. They accomplished this by broadening their sources of revenue so as to avoid big deficits. The strategy is working.
Financial Secretary John Tsang offered to refund part of the salaries and profits taxes paid last year, which is a welcome if temporary measure. He also mentioned in his Budget Speech a proposal by the Hong Kong General Chamber of Commerce to introduce a two-tiered profits tax regime. Unfortunately, he continues to think “low and simple” is the only policy necessary, and so did less than he might have to help SMEs.
We believe a two-tiered tax regime is part of the steps we need to take to shore up our competitiveness. Under our proposal, which is open to tinkering, the first $2 million of taxable revenue would be charged at a 10% rate, and after that the standard rate would apply. (We believe the standard rate should be returned to the 15% level, but that’s another matter.) To keep it simple, the 10% rate would apply to all companies, eliminating the need to determine eligibility.
This change would add no unfathomable complexity but it would boost our international competitiveness. The smaller a company is, the greater the benefit from this plan, and there is ample precedence as to how to define and administer this pro-active step toward rebuilding our international competitiveness. Moreover, as we proved by cutting the wine import duty, sometimes less revenue means more opportunities, and in this case, more taxable profits for SMEs.
The Government’s fiscal reserves are expected to reach $734 billion by the end of March, equal to some $700,000 per company registered in Hong Kong. We’re all in favour of fiscal prudence, but it is time to stop unnecessarily taking money from the economy. After running budget deficits for three years up to 2003/04, we’ve now run surpluses for nine years in a row. It’s time to put that money to work.
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