Investors in double trouble
GOVERNMENTS tend to regard Hong Kong as a tax haven. Many foreign business have traditionally agreed. The territory's low corporate taxes and its unusual habit of not levying tax on business conducted abroad compare favourably with all but a few tiny countries where the economy is based on their tax haven status.
The territory has never used special incentives to attract investors, because low taxes, free-and-easy capitalism and our role as a service hub for China have brought them here anyway. So few foreign governments have sought to negotiate double taxation agreements with Hong Kong, and the Government here has seen them as unnecessary.
However, high rents and high inflation have blunted the territory's competitive edge and some companies based here may be weighing the advantages of relocating to regional centres which do have double taxation agreements. Corporate tax of 16.5 per cent may seem small compared with the rates foreign companies pay at home. But if they have to pay both, Hong Kong taxes look prohibitive.
It is hard to generalise about the effects of double taxation, because of the many exemptions and loopholes foreign businesses are able to exploit in their home bases. But it has been claimed that European companies are considering leaving and that some prefer Shanghai because of China's double taxation treaties. If so, the Government should re-examine its principles.
It may come to the conclusion that no (or only limited) treaty arrangements are needed. But it should not put off investors by failing to review its position.