We do not need a discriminatory tax
The Closer Economic Partnership Arrangement between Hong Kong and the mainland promotes bilateral trade in goods and services and regional integration. In particular, it extends the reach of our world-class services sector into the mainland's booming industrial economy.
There are benefits for both sides. For Hong Kong, where the services industry accounts for 80 per cent of our economy, these are important and obvious. Therefore, any measure which undermines our competitiveness in the mainland market should be cause for concern to both parties, and calls for a response from the Hong Kong government.
A new regulation announced by the mainland appears to be a case in point. From October 1, Hong Kong, Macau and Taiwanese residents who work in China for more than three months a year on mainland employment contracts, and their employers, will have to contribute to national social security schemes.
This will be a financial incentive to firms providing services to the world's fastest-growing economy to employ foreign nationals rather than Hong Kong professionals.
The regulation was announced in June as part of a package lifting quotas on Taiwanese workers and giving them access to social security benefits. Its potentially damaging impact on Hong Kong has only just emerged. The Financial Services and the Treasury Bureau said it was unaware of the regulation. Sadly, this has deprived interested parties of the opportunity to have input.
We need to know more detail, but the mainland's Ministry for Labour and Social Security is leaving publication of that to local officials. The Hong Kong government should seek clarification from Beijing. Hong Kong workers on the mainland have always had to pay tax. But this measure puts them on the same footing as mainland workers.
If the rationale is that Hong Kong workers may enjoy social security benefits from the mainland, why not apply that to foreigners also? About 230,000 Hong Kong residents were employed fulltime on the mainland in 2003. The number will be greater now. Human resources specialists say most could be affected by the new regulation because they are required to sign contracts with foreign-invested enterprises and joint ventures to secure work permits.
Social security contributions will be calculated on the basis of local salaries. In Beijing, an employer would have to pay a social security contribution of 2,317 yuan a month for a Hong Kong employee. The employee would have to pay 747 yuan a month. The employee would be able to reclaim contributions on leaving the mainland, but most of the employer's payments would not be recoverable from the central social security fund.
This amounts to a simple tax. The regulation was regarded by some as impractical because most of the Hong Kong employees would not remain on the mainland once they retired. The low level of benefits likely to be funded by the social security scheme would not be an incentive to stay.
Mainland employers may try to avoid the social security contribution by setting up 'briefcase' companies in Hong Kong to employ professionals. This does nothing to further the ideals of business and economic integration with the mainland.
When Cepa was signed more than two years ago, restrictions on Hong Kong professionals were relaxed. Progress has been slow in some cases, pending agreement on mutual recognition of qualifications, elimination of qualifying examinations and other matters. But it will be good for professions on both sides of the border by introducing competition and best international practice.
Trade in goods may be more tangible, but it is in the area of services where bilateral trade could benefit most from the liberalisation under Cepa. A tax that discriminates against Hong Kong goes against the spirit of the arrangement.
