Call for wise spend­ing as SAR purse gets fat­ter

With the Hong Kong gov­ern­ment once again poised to re­port a much higher than es­ti­mated bud­get sur­plus for the 2014-15 fifi scal year, an­a­lysts be­lieve the money should be spent wisely to ce­ment long-term com­pet­i­tive­ness of the city’s tax regime and mainta

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When Fi­nan­cial Sec­re­tary John Tsang Chun-wah an­nounces the gov­ern­ment Bud­get on Feb 25 for the 2015-16 fis­cal year, he would prob­a­bly miss the mark once again on his bud­get sur­plus fore­cast, as the ad­min­is­tra­tion is be­lieved to have posted a much higher fig­ure than he an­tic­i­pated for the 2014-15 fis­cal year.

Var­i­ous ac­count­ing firms es­ti­mate the gov­ern­ment will run up a huge bud­get sur­plus, much larger than its re­vised es­ti­mate of HK$9.1 bil­lion (Ta­ble 1), due to higher than ex­pected col­lec­tions from prof­its tax, stamp duty rev­enues, ad­di­tional rev­enue through the Dou­ble Stamp Duty in­tro­duced in 2013 as a prop­er­ty­cool­ing mea­sure, as well as the ad­min­is­tra­tion’s over-es­ti­mates on ex­pen­di­ture.

As a re­sult, the ad­min­is­tra­tion is pre­dicted to ac­cu­mu­late a to­tal fis­cal re­serve of over HK$800 bil­lion by the end of March 2015 — equiv­a­lent to 30 months’ gov­ern­ment ex­pen­di­ture at max­i­mum (Ta­ble 2).

De­spite the wind­fall, ac­count­ing ad­vi­sory firms and pro­fes­sional bod­ies are op­posed to the gov­ern­ment an­nounc­ing cash hand­outs once again. In­stead, they feel, it should pru­dently con­sider ways to make good use of the huge fis­cal re­serves to safe­guard Hong Kong’s eco­nomic com­pet­i­tive­ness and help fam­i­lies and the com­mu­nity.

Ernst & Young (EY) has pro­posed a pack­age of fis­cal re­lief mea­sures to al­le­vi­ate the fi­nan­cial bur­den of in­di­vid­ual tax­pay­ers and lo­cal en­ter­prises that would cost the Hong Kong gov­ern­ment a to­tal of HK$7.3 bil­lion. The ac­count­ing ad­vi­sory firm also pro­poses an­other HK$2 bil­lion in re­lief packages, in the form of prof­its tax re­duc­tion, util­ity charge con­ces­sions and a one-year li­cens­ing fee waiver, to help lo­cal busi­nesses af­fected by the Oc­cupy Move­ment last year.

Also, ac­count­ing ad­vi­sory and pro­fes­sional bod­ies across the board have called for the in­tro­duc­tion of more fi­nan­cial re­lief mea­sures to re­duce the fis­cal bur­den of the city’s mid­dle class and work­ing public (Ta­ble 3).

Be­sides in­di­vid­ual tax­pay­ers, the city’s busi­ness firms also de­serve to be helped, th­ese bod­ies say, es­pe­cially small and medi­um­sized en­ter­prises, which are the back­bone of the econ­omy (Ta­ble 3).

“Fac­tors that we con­sid­ered in­cluded the ris­ing cost of living that fam­i­lies face in Hong Kong, the need for peo­ple to de­velop new skill sets to suc­ceed in a knowl­edge-based so­ci­ety and, in the medium and longer term, the im­por­tance of en­cour­ag­ing in­di­vid­u­als to plan bet­ter for their re­tire­ment,” said Florence Chan Yuen-fan, tax­a­tion fac­ulty ex­ec­u­tive com­mit­tee chair­woman at the Hong Kong In­sti­tute of Cer­ti­fied Public Ac­coun­tants (CPAs).

And Aye­sha Macpher­son Lau, tax part­ner in charge at KPMG, said:“Rev­enues from tax col­lec­tion, in­vest­ment in­come and land sales fluc­tu­ate se­verely with the global eco­nomic sit­u­a­tion. De­spite hold­ing around HK$800 bil­lion of re­serves in hand, the gov­ern­ment should con­tinue to pur­sue a pru­dent ap­proach and spend its money wisely to im­prove Hong Kong’s com­pet­i­tive­ness.”

“All the above bur­den-al­le­vi­a­tion mea­sures should go hand in hand with a com­pre­hen­sive re­view of the city’s tax regime to en­hance Hong Kong long-term eco­nomic com­pet­i­tive­ness,” Lau added.

Among the var­i­ous as­pects of the sug­gested tax sys­tem re­view, ex­plor­ing op­tions to ex­pand the nar­row tax base is the most sig­nif­i­cant.

Hong Kong is heav­ily de­pen­dent on di­rect tax re­ceipts, based on the 16.5 per­cent prof­its tax and 15 per­cent salaries tax levied. There are no other in­di­rect taxes such as a sales tax, a div­i­dend tax or cap­i­tal gains tax in the SAR. The gov­ern­ment abol­ished es­tate duty in 2006 and wine tax in 2008.

Ac­cord­ing to data from the Tax­a­tion In­sti­tute of Hong Kong (TIHK), only 1.6 mil­lion of the work­ing pop­u­la­tion — out of a to­tal of 3.6 mil­lion em­ployed — pay salaries tax. And of th­ese 1.6 mil­lion salaried tax­pay­ers, around 200,000 con­trib­ute 80 per­cent of the to­tal salaries tax re­ceipts, while just 800 com­pa­nies con­trib­ute 60 per­cent of to­tal prof­its tax re­ceipts.

“Re­duc­ing re­liance on di­rect taxes and en­hanc­ing the pro­por­tion of in­di­rect levies to boost tax re­ceipts is al­ready the in­ter­na­tional trend. The Hong Kong gov­ern­ment should for­mu­late a long-term plan now on how to re­form the city’s nar­row tax base. The ad­min­is­tra­tion can­not re­main com­pla­cent un­til ex­ter­nal macroe­co­nomic con­di­tions war­rant re­form,” cau­tioned Curtis Ng Yiu-fai, 2015-16 bud­get pro­pos­als sub­com­mit­tee con­vener at the Hong Kong In­sti­tute of CPAs.

“We sug­gest the ad­min­is­tra­tion con­duct a com­pre­hen­sive re­view of the city’s tax regime, in­clud­ing whether to levy any form of in­di­rect taxes such as a sales tax,” said Fer­gus Wong Wang-tai, chair­man of the As­so­ci­a­tion of Char­tered Cer­ti­fied Ac­coun­tants (ACCA).

Joseph Yau Yin-kwun, pres­i­dent of TIHK, ex­plained: “A broad­ened tax base with new sta­ble sources of in­come will al­low the gov­ern­ment to re­duce its fis­cal re­serve and put in more re­sources to ad­dress the long-term so­cial is­sues of Hong Kong such as ed­u­ca­tion, so­cial wel­fare and health-care.”

CPA Australia sug­gests that the gov­ern­ment con­sider a 3 per­cent luxury goods tax as a pre­cur­sor to a broad-based goods and ser­vices tax.

Price­wa­ter­house­Coop­ers (PwC) tax part­ner So Kwok-kee en­vis­ages that the grid­lock of a nar­row tax base can­not be re­solved within the term of the cur­rent ad­min­is­tra­tion.

“We ex­pect the cur­rent-term gov­ern­ment in Hong Kong will not make sig­nif­i­cant changes to the tax­a­tion sys­tem but it should kick­start dis­cus­sions to ex­plore var­i­ous al­ter­na­tives to ex­pand the tax base,” So said.

KPMG, how­ever, are more cau­tious to­ward new forms of in­di­rect taxes. They said levy­ing new in­di­rect taxes, such as a sales tax, should be care­fully stud­ied be­cause im­pos­ing new taxes will re­quire other ap­pro­pri­ate com­ple­men­tary mea­sures.

Var­i­ous tax ex­perts also urge that the In­land Rev­enue Or­di­nance be re­viewed, in or­der to boost longterm eco­nomic com­pet­i­tive­ness.

“Given the pas­sage of time and the tremen­dous changes that have taken place in the man­ner in which busi­nesses op­er­ate, in­clud­ing sub­stan­tial rules gov­ern­ing how re­sults of busi­ness trans­ac­tions are re­flected in fi­nan­cial ac­counts, we con­sider it ap­pro­pri­ate to per­form a fur­ther com­pre­hen­sive re­view.” EY’s Hong Kong and Ma­cao tax man­ag­ing part­ner Tracy Ho Suk­fan ar­gued.

Defin­ing the sources of prof­its clearly is the first and fore­most task. This is es­pe­cially im­por­tant as th­ese days many cross-bor­der fi­nan­cial and busi­ness trans­ac­tions fa­cil­i­tated by ad­vanced tech­nol­ogy are in­creas­ingly blur­ring the lines in defin­ing the “source of prof­its”.

“If the In­land Rev­enue Depart­ment can lay down more clear guide­lines on in­ter­pret­ing cor­po­rate prof­its, multi­na­tional com­pa­nies can bet­ter gauge their tax bur­dens aris­ing from busi­ness op­er­a­tions in Hong Kong. This should help in pro­mot­ing Hong Kong’s sta­tus as a re­gional cor­po­rate hub for multi­na­tion­als,” said PwC tax part­ner Agnes Wong Hill-yin.

Group loss re­lief is the sec­ond as­pect that a tax law re­view could fo­cus on. ACCA rec­om­mends in­tro­duc­ing group loss re­lief, where the losses of a group com­pany can off­set the tax­able prof­its of hold­ing com­pa­nies within the group, hence re­duc­ing the com­pany tax bur­den. In ad­di­tion, the tax loss of a busi­ness could be al­lowed to be “car­ried back” to off­set as­sess­able prof­its in the pre­ced­ing year.

Third, many Hong Kong en­ter­prises cur­rently can­not en­joy tax con­ces­sions if they op­er­ate ma­chin­ery equip­ment or plants on the main­land, and that makes th­ese lo­cal en­ter­prises bear a higher ef­fec­tive tax rate.

“We sug­gest loos­en­ing Ar­ti­cle 39E of the In­land Rev­enue Or­di­nance, so that Hong Kong en­ter­prises with man­u­fac­tur­ing ma­chin­ery and plants can en­joy tax de­duc­tions on de­pre­ci­a­tion,” PwC’s Wong added.

KPMG high­lighted that the gov­ern­ment should also re­view the cur­rent prin­ci­ple of ter­ri­to­ri­al­ity in tax col­lec­tion; as the ac­count­ing firm be­lieves it is hurt­ing Hong Kong’s com­pet­i­tive­ness.

Un­der the prin­ci­ple of ter­ri­to­ri­al­ity, cor­po­rate profit taxes will be as­sessed based on in­comes de­rived from eco­nomic ac­tiv­i­ties in Hong Kong. How­ever, many coun­tries adopt the prin­ci­ple of res­i­dency in tax col­lec­tion where taxes are levied ac­cord­ing to the com­pany’s res­i­dent sta­tus.

“Be­cause the Hong Kong tax author­ity ex­empts from tax en­ter­prises’ in­comes de­rived out­side Hong Kong, tax au­thor­i­ties in other ju­ris­dic­tions will not grant other tax con­ces­sions to th­ese en­ter­prises, which means th­ese multi­na­tion­als find it dif­fi­cult to gauge their tax bur­dens aris­ing from global busi­ness op­er­a­tions,” KPMG tax prin­ci­pal Stan­ley Ho Ki-fai said.

Apart from tax law re­vi­sion, the gov­ern­ment is also be­ing called upon to es­tab­lish a strate­gic unit so that the com­pet­i­tive­ness of the Hong Kong tax regime can be proac­tively for­ti­fied.

“Many West­ern coun­tries have done a lot to en­hance their tax regime trans­parency so that cor­po­ra­tions can ac­cu­rately es­ti­mate their tax costs. Asian na­tions have also in­tro­duced many tax con­ces­sion­ary poli­cies to at­tract more in­vest­ment. Hong Kong needs to be more re­spon­sive to ma­jor de­vel­op­ments in in­ter­na­tional and re­gional tax and bol­ster its tax regime sta­bil­ity,” said Chan at the Hong Kong In­sti­tute of CPAs. Con­tact the writer at oswald@chi­nadai­lyhk.com

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