For a brighter tomorrow
Proposed profits tax changes are likely to attract more offshore funds, writes Andrea Li
Hong Kong has long been considered an economic success story, having transformed itself from a tiny fishing village into one of the world's most important finance centres.
The city's accomplishments have been made possible over the years by political and economic stability, a good regulatory infrastructure that ensures checks and balances of corporations and a fair legal system.
But things are about to get much better for one of the world's freest economies, thanks to a government plan to increase the investment attractiveness of the city.
Under a proposed bill, non-Hong Kong residents investing in funds not domiciled in Hong Kong will be exempt from paying profits tax derived from dealings in securities, futures contracts and leveraged foreign exchange trading in Hong Kong.
The move is expected to enhance the status of the city as an investment-friendly and competitive international finance centre rivalling New York, London and Singapore, which have the same tax exemption mechanism.
'Anchoring offshore funds in Hong Kong markets could help maintain international expertise, promote new products and further develop the local fund management industry,' said a spokesman from the Financial Services and the Treasury Bureau.
'It will also lead to an increase in market liquidity and employment opportunities in the financial services and related sectors, including the local fund management industry.'
If the bill is passed, it would lead to an increase in employment opportunities not only in the fund management industry but also in related services, such as those provided by brokers, accountants, bankers and lawyers, said Dennis Chow, managing director of the asset management division of GT Capital.
While specified investment funds such as mutual funds, unit trusts and similar investment schemes authorised under the Securities and Funds Ordinance are already exempt from profits tax, the government has recognised that a significant number of offshore funds do not fall within these parameters, and is therefore planning to widen the tax exemption benefit to cover them.
A spokesman for the Financial Services and the Treasury Bureau said the bill was first presented to the Legislative Council in early July, and a committee was set up to further examine it before it was presented for second and third readings.
Florence Yip, investment management group tax partner at PricewaterhouseCoopers, said the move had been welcomed by professionals in the industry, but the government still needed to look into the full nature of the fund management sector and the role of fund managers to ensure the bill had the maximum desired impact.
At present, offshore funds are required under Hong Kong's Internal Revenue Ordinance to pay taxes on profits gained from local exposure to stocks or bonds.
Profits tax was at a rate of 17.5 per cent, said Ms Yip.
Meanwhile, figures show fund management is big business in Hong Kong.
According to the Securities and Futures Commission's Fund Management Activities Survey last year, fund management business in the city amounted to $3.6 trillion at the end of last year, up 23 per cent from the year before.
The survey said the 23 per cent increase not only reflected Hong Kong's position as a leading regional financial centre but showed investors' optimism towards the financial markets in the region.
Corporations remain the primary driver of growth, it said, accounting for 86 per cent of the increase in the combined fund management business last year.
Meanwhile, employment in the fund management business grew by 12 per cent, with 17,039 people employed in the sector at the end of last year.
In percentage terms, the largest staff increase in the business was seen in research and analysis activities, up 37 per cent from 2003. Corporate planning and business management staffing were both up by 20 per cent, dealing and trading climbed 14 per cent, while sales and marketing rose by 13 per cent, the survey showed.
China's economic growth potentially means there is more good news on the way for Hong Kong, given that many wealthy mainlanders are likely to use Hong Kong to invest overseas.
According to Mr Chow, if just 5 per cent of the mainland's estimated current savings of US$1.3 trillion was invested through Hong Kong agents, it would in theory result in an additional 2,300 jobs for the industry here.
There is no doubt the future looks bright for both the mainland and Hong Kong.
'While the good legal infrastructure and regulatory framework of Hong Kong provide a safe and proper investment environment for wealthy mainlanders, their investment will in turn provide very good opportunities for the Hong Kong job market,' said Mr Chow.
Fund managers need to have good analytical skills, strong numeracy and the ability to look at things from a macro perspective.
'The job is extremely dynamic because the managed portfolio could change from week to week, and you need to be quick and decisive in order to respond to market changes,' Mr Chow said. 'It can also sometimes be a very lonely job so you have to be able to make the right decisions independently and then stick with the outcome.'