Capital Gains Tax

The taxman cometh

PUBLISHED : Thursday, 04 November, 2004, 12:00am
UPDATED : Thursday, 04 November, 2004, 12:00am

Kicking off his consultation on next year's budget, Financial Secretary Henry Tang Ying-yen has put on the table seven taxes that could be introduced, abolished or varied. One, a goods and services tax, has been presented as a means of widening the tax base and producing a new source of stable and reliable revenue.

Picking up from what he mooted in presenting this year's budget in March, Mr Tang wants the public to tell him whether estate duty should be abolished to enhance Hong Kong's attraction as an asset management centre, and alcohol duty dropped to boost tourism. He talked of introducing a tyre tax; now, he is taking the idea of a 'green tax' further by suggesting the imposition of a levy on plastic bags. In the wake of a decision by the private Western Harbour Crossing to raise tolls, he is seeking to charge more at the government-owned Cross Harbour Tunnel to raise revenue and reduce congestion.

But what have really come as a great surprise are his proposals to introduce a capital gains levy and to tax foreign-sourced income; these are ideas considered and rejected by the Advisory Committee on New Broad-Based Taxes.

In a report published in 2002, the committee said that 'capital gains taxes are noted for their susceptibility to adverse economic cycles' and 'revenue yields are volatile'. The related legislation would be complex to administer and go against Hong Kong's policy of maintaining a simple tax system, it added.

Moreover, 'under our existing sourced-based system of taxation, Hong Kong residents may be encouraged to invest offshore in order to avoid capital gains taxes on their investment gains,' said the committee. 'Capital gains taxes dampen investment and are not conducive to capital formation. The introduction of a capital gains tax may also have a detrimental effect on Hong Kong as a destination for regional share listings and as a regional financial centre.'

For a community still recovering from an asset price bubble that saw property values plunge by nearly 70 per cent between 1997 and last year, talk of taxing capital gains now is certainly untimely. Those who got their fingers burned would want to use future gains in property investments to cover their losses, not pay taxes.

As for taxing worldwide incomes of businesses and individuals, that would amount to a fundamental change of our current territorial-based system. The committee's conclusion was that Hong Kong would not collect more taxes by doing so, as a credit would have to be given for any tax paid on foreign-sourced income in its country of origin, and the amount of such credit in most cases would be greater than the Hong Kong tax on that income, unless we also raised our tax rates.

Of course, the committee's conclusions are not binding, and Mr Tang should lead the public to reconsider the issues if he thinks fit. In fact, as Hong Kong companies have become more externally oriented, deriving more of their income from their mainland and overseas operations, our tax laws may need to change to 'catch' their offshore incomes. The risk is that companies may be driven to relocate, eroding Hong Kong's competitiveness as a base for multinationals.

If Mr Tang is serious about revisiting the conclusions of the committee, then the cursory way in which he does so is baffling. The only justification in his budget consultation document for introducing a capital gains tax and switching to a resident-based system is that they are common among major tax jurisdictions. He has not even listed the pros and cons of adopting these two highly controversial revenue-raising measures.

If he is floating them as a backhanded way of dressing up the appeal of the other taxes, then he is being unnecessarily alarmist.

C.K. Lau is the Post's executive editor, policy