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
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 firstname.lastname@example.org