Taxation system overhaul to ‘lift HK’s competitiveness’
Atwo-tier profits tax structure and deeper tax cuts for spending on research and development (R&D) — major milestones proposed in last year’s tax policy reform — will make Hong Kong more competitive and diversify its economic structure, professional accountants say.
The two-tier profits tax rates will come into effect from the 2018-19 year of assessment after the Inland Revenue (Amendment) (No. 3) Ordinance 2018 was enacted on March 29.
Chief Executive Carrie Lam Cheng Yuet-ngor proposed the overhaul in her maiden Policy Address in October last year, with a two-tier profits tax system allowing for the first HK$2 million of assessable profits of corporations and unincorporated businesses (proprietorships and partnerships) to be taxed at 8.25 percent and 7.5 percent, respectively, irrespective of their industry and size.
Professional accountants agreed that small and medium-sized enterprises (SMEs), in particular, stand to benefit.
“Reducing the profits tax burden allows SMEs to save more financial resources that could be used for upgrading technology platforms and human resources training. Digitalization and manpower training are the two essential ingredients for local SMEs to excel,” Paul Ho Yiu-po, Greater China divisional president 2018 at CPA Australia, told China Daily.
Kenneth Wong Kin-wah, ACCA (the Association of Chartered Certified Accountants) Hong Kong’s tax sub-committee co-chairman for 2018-19, while welcoming the reform, urged the government to do more, especially in creating more business opportunities for SMEs.
He called for greater efforts to foster SMEs’ business transformation amid the nation’s key development projects, such as the Belt and Road Initiative and the Guangdong-Hong Kong-Macao Greater Bay Area.
“The government should address SMEs’ knowledge gap and capital shortage in embracing technology in their business operations as their existing business models are quite old-fashioned. Many local SMEs, at present, do not have adequate resources to understand the Belt and Road Initiative and the Bay Area projects and therefore may not be able to seize the business opportunities arising from these initiatives,” Wong said.
An enhanced tax cut regime for eligible research and development expenditure was also proposed by Lam in her policy speech. The relevant Inland Revenue (Amendment) (No. 3) Bill 2018 was gazetted on April 20 and tabled in the Legislative Council on May 2.
It provides for a 300 percent deduction for the first HK$2 million spending incurred by an enterprise (in-house qualifying R&D) and payments made to designated local research institutions (out-sourced qualifying R&D), and a 200 percent cut for the remaining amount.
According to Ho, some of his clients from Hong Kong, Chinese mainland and overseas enterprises are considering expanding their R&D activities in the SAR. The enterprises, including startups, cover such sectors as manufacturing, finance and technology.
He said more tax cuts for R&D activities will help lighten companies’ tax burdens as their future profits can be offset by tax losses carried forward to reduce their tax bills.
“The government has established the taxation policy framework and companies will craft business strategies on how to take the advantages provided by taxation policy changes. Whether enterprises will bolster their business presences in Hong Kong also depends on their business model considerations and manpower allocation,” Ho said.
In Wong’s view, deeper tax cuts for R&D activities alone may not solve the cash flow problem of enterprises.
“The government should also consider enacting new tax laws to allow tax-paying companies to swap their losses arising from R&D activities in exchange for tax refunds. These refunds are really cash inflows that can lure enterprises to conduct more R&D activities,” he said.
Wong and Ho reckoned that tax policy changes for corporate treasury centers and aircraft leasing activities can also foster economic development and create more jobs in Hong Kong.
“Many Hong Kong SMEs provide business support services, such as legal and accounting services, to enterprises which set up corporate treasury centers and aircraft leasing companies’ platforms in Hong Kong. Therefore, favorable tax treatment for these companies would boost economic activities and employment,” said Ho.