Mas­sive re­serves could boost key sec­tors in HK

Busi­ness ser­vice com­pa­nies call for growth hotspots to be nur­tured through tar­geted tax in­cen­tives

China Daily (Hong Kong) - - BUSINESS - By OSWALD CHAN in Hong Kong oswald@chi­nadai­

With the do­mes­tic econ­omy likely to have ex­panded last year at the slow­est rate since 2008, Hong Kong’s gov­ern­ment should rein­vig­o­rate eco­nomic growth by lever­ag­ing its arse­nal— the bur­geon­ing fis­cal re­serves — to pro­mote key seg­ments of high-growth in­dus­tries.

Spe­cific tax in­cen­tives for the high-tech­nol­ogy, in­tel­lec­tual prop­erty (IP) trad­ing and air­craft leas­ing in­dus­tries should be con­sid­ered to fos­ter an in­no­va­tion-driven econ­omy in Hong Kong. Th­ese mea­sures were des­per­ately needed for eco­nomic trans­for­ma­tion, au­dit­ing ad­vi­sory firms and pro­fes­sional ac­count­ing bod­ies be­lieved.

The Spe­cial Ad­min­is­tra­tive Re­gion’s gov­ern­ment is set to an­nounce the 2017-18 Bud­get on Fe­bru­ary 22, when it will re­veal the shape of gov­ern­ment fi­nances for the past fis­cal year. The gov­ern­ment is tipped to record a con­sol­i­dated bud­get sur­plus of HK$59 bil­lion to HK$85 bil­lion for 2016-17; fis­cal re­serves are pro­jected to soar to as much as HK$928 bil­lion as at the end of March.

Hong Kong’s fis­cal re­serves con­tinue to bal­loon as the do­mes­tic econ­omy is bat­tered by the slow­down of the main- land econ­omy, fal­ter­ing re­tail sales and a pos­si­ble mar­ket cor­rec­tion trig­gered by im­mi­nent in­ter­est-rate in­creases in the United States.

There are thus strong calls for the gov­ern­ment to har­ness the ex­cess re­serves to of­fer cer­tain high-growth in­dus­tries tax in­cen­tives to di­ver­sify the econ­omy amid ane­mic growth.

On Fe­bru­ary 22, the ad­min­is­tra­tion will an­nounce Hong Kong’s eco­nomic growth rate for full-year 2016. GDP was es­ti­mated by the gov­ern­ment to have ex­panded 1.5 per­cent in Novem­ber, the slow­est growth rate since the global fi­nan­cial cri­sis in 2008.

The new high-tech­nol­ogy and cre­ative in­dus­tries are the first sec­tors in which the gov­ern­ment should con­sider grant­ing tax in­cen­tives to spur in­no­va­tion in Hong Kong.

Global au­dit­ing firm Ernst & Young (EY), along with other au­dit and pro­fes­sional ac­count­ing bod­ies, rec­om­mends the gov­ern­ment de­sign the pro­posed Hong Kong-Shen­zhen In­no­va­tion and Tech­nol­ogy Park as a pref­er­en­tial tax zone.

The Hong Kong SAR and the Shen­zhen Mu­nic­i­pal Peo­ple’s Gov­ern­ment last month signed an agree­ment to jointly de­velop an in­no­va­tion and tech­nol­ogy park at the Lok Ma Chau Loop. Un­der the deal, both sides will es­tab­lish a key base for co­op­er­a­tion in sci­en­tific re­search by li­ais­ing with top­tier en­ter­prises, re­search and de­vel­op­ment in­sti­tu­tions as well as higher ed­u­ca­tion in­sti­tu­tions on the Chi­nese main- land and over­seas.

The mea­sures in­clude pro­vid­ing a con­ces­sion­ary prof­its tax rate of 8.25 per­cent (half the nor­mal rate of 16.5 per­cent) for qual­i­fy­ing en­ter­prises; only 50 per­cent of the as­sess­able in­come of in­di­vid­u­als em­ployed as high-tech­nol­ogy or cre­ative pro­fes­sion­als by en­ter­prises in the park should be sub­ject to salaries tax.

The se­cond batch of sug­ges­tions is to of­fer ap­pro­pri­ate in­come and prof­its tax con­ces­sions to ce­ment the growth of in­no­va­tive star­tups and high­tech­nol­ogy busi­nesses.

EY pro­posed that if an­gel in­vestors could com­mit a min­i­mum of HK$500,000 in a qual­i­fy­ing startup, they would then be en­ti­tled to en­joy a tax de­duc­tion of 50 per­cent of their in­vest­ment at the end of a three-year hold­ing pe­riod, sub­ject to a cap of HK$1 mil­lion for each year of as­sess­ment.

Deloitte sug­gested a 10-per­cent con­ces­sion­ary prof­its rate for the ini­tial 5 years for qual­i­fy­ing high-tech­nol­ogy star­tups (80 per­cent of em­ploy­ees should be Hong Kong res­i­dents and an­nual lo­cal spend­ing on high-tech­nol­ogy busi­ness ac­tiv­i­ties should ex­ceed HK$5 mil­lion).

The third type of rec­om­men­da­tions is to pro­vide tax in­cen­tives to en­cour­age re­search and de­vel­op­ment in Hong Kong.

Re­lated mea­sures pro­posed by EY in­clude al­low­ing a su­per tax de­duc­tion of 200 per­cent for qual­i­fy­ing R&D ex­pen­di­ture and al­low­ing su­per tax de­duc­tion of 150 per­cent for em­ployee train­ing costs paid to ac­cred­ited providers of train­ing ser­vices.

“It is through continuous in­no­va­tion that more high-pay­ing jobs will be cre­ated in Hong Kong which, in turn, will help to pro­pel eco­nomic growth in a sus­tain­able man­ner and cre­ate op­por­tu­ni­ties for up­ward so­cial mo­bil­ity,” EY Hong Kong and Ma­cao Man­ag­ing Part­ner Agnes Chan en­vis­aged.

EY’s peer com­pany Deloitte rec­om­mended that the gov­ern­ment in­tro­duce a su­per de­duc­tion by al­low­ing a 200-per­cent tax de­duc­tion on qual­i­fy­ing R&D ex­pen­di­ture on high­tech­nol­ogy busi­ness ac­tiv­i­ties; de­ductible ex­pen­di­ture should in­clude ex­ter­nal costs and fees paid to all re­search in­sti­tutes.

“The gov­ern­ment should es­tab­lish a tax pol­icy group on a per­ma­nent ba­sis to re­view tax pol­icy pe­ri­od­i­cally and in­tro­duce tax in­cen­tives for en­cour­aged in­dus­tries,” said Davy Yun, a tax part­ner at Deloitte China. “Cur­rently, the Fi­nan­cial Ser­vices and the Trea­sury Bu­reau and the In­land Rev­enue Depart­ment only con­duct tax re­views in a piece­meal man­ner which may not be able to cope with changes in Hong Kong’s econ­omy.”

Tw o o t h e r p r o f e s s i o n a l ac­count­ing bod­ies — the Hong Kong In­sti­tute of Cer­ti­fied Pub­lic Ac­coun­tants (CPA) and the As­so­ci­a­tion of Char­tered Cer­ti­fied Ac­coun­tants (ACCA) — also sup­ported a su­per tax de­duc­tion for qual­i­fy­ing R&D ex­pen­di­ture and ap­pro­pri­ate cash re­bate for des­ig­nated ex­pen­di­tures in­curred in the in­no­va­tion in­dus­try.

The Hong Kong In­sti­tute of CPAs urged the Hong Kong gov­ern­ment to es­tab­lish the city as an IP hub so it could re­main ahead of the curve by po­si­tion­ing it­self at the high end of the in­dus­try value chain. Re­lated

The gov­ern­ment should es­tab­lish a tax pol­icy group on a per­ma­nent ba­sis to re­view tax pol­icy pe­ri­od­i­cally and in­tro­duce tax in­cen­tives for en­cour­aged in­dus­tries.”

mea­sures in­clude al­low­ing de­duc­tions when R&D ac­tiv­i­ties are sub-con­tracted out­side Hong Kong but con­trol and risk-tak­ing ac­tiv­i­ties re­main in the city, as well as ex­pand­ing the range of tax-de­ductible IP rights.

EY rec­om­mended roy­al­ties de­rived from IP rights cre­ated or de­vel­oped in Hong Kong and li­censed for use out­side Hong Kong should be sub­jected to a con­ces­sion­ary profit tax rate of 8.25 per­cent.

Au­dit­ing firm Price­wa­ter­house­Coop­ers (PwC) said the gov­ern­ment should also ex­plore the pos­si­bil­ity of re­lax­ing the re­stric­tion im­posed on tax de­pre­ci­a­tion al­lowances of the In­land Rev­enue Ordinance Sec­tion 39E to en­hance air­craft leas­ing op­er­a­tions in Hong Kong.

“Air­craft fi­nance and leas­ing will be an ad­di­tional piece of the jig­saw of fi­nan­cial ser­vices in the city. It will pro­vide new job op­por­tu­ni­ties and at­tract highly skilled peo­ple to Hong Kong,” as­serted Clarence Le­ung, as­set fi­nance and leas­ing di­rec­tor at PwC HongKong.


Amid a sub­dued econ­omy, fal­ter­ing re­tail sales and ris­ing in­ter­est rates, there have been mount­ing calls for the Hong Kong gov­ern­ment to grant tax in­cen­tives for cer­tain high-growth in­dus­tries to help but­tress the growth of the in­no­va­tion sec­tor and en­able the lo­cal econ­omy to grow rapidly.

Davy Yun,

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