HK needs to tackle taxing issues

PUBLISHED : Tuesday, 06 April, 2010, 12:00am
UPDATED : Tuesday, 06 April, 2010, 12:00am

Hong Kong can offer more incentives to make the city attractive for multinationals. One way to do so is to make the business environment more viable and offer tax incentives. Grace Tang, partner, tax and business advisory services at Ernst & Young, says that the government should look at allowing deductions for research and development.

She says Hong Kong's corporate tax is lower than Singapore's, at 16.5 per cent compared with Singapore's 17 per cent, but the Lion City is considered attractive by multinationals because it offers a number of incentives.

In the 2009-10 policy address, Chief Executive Donald Tsang Yam-kuen indicated that in addition to the 'Four Pillar Industries', the government would encourage the development of a further 'Six Industries', as they were also crucial to Hong Kong's economic well-being.

The government's efforts to diversify the economy by promoting other industries was welcomed by tax professionals, such as Ernst & Young, but they say that the government can take further steps by providing tax incentives.

One of them is the tax deduction for costs incurred on acquiring certain intellectual property rights.

Tang says that under the profits tax rules, only the capital costs incurred on acquiring patent and industry know-how rights are eligible for tax deductions. The acquisition costs of other intellectual property rights, such as copyrights, trademarks and licences to operate specific businesses, are not eligible for any tax relief.

Tsang accepted some of the proposals made by various professional bodies, including Ernst & Young, to extend the tax deductions to cover registered trademarks, copyrights and registered designs.

Since taxpayers in the innovation and technology, and cultural and creative industries often need to incur significant capital expenditure on such intellectual property rights, Ernst & Young and other tax professionals believe this proposal will help relieve the tax burden of many business operations in these sectors. However, some would argue the extension should be wider to cover other types of intellectual property rights.

Another area of tax incentive suggested by professionals is tax deductions for costs incurred on research and development.

Apart from incurring acquisition costs on intellectual property rights, taxpayers engaged in innovation and technology often have to conduct research and development projects. In this regard, the government will launch an R&D Cash Rebate Scheme this month, whereby qualifying research and development expenditure for projects will enjoy a cash rebate equivalent to 10 per cent of the investment.

Tang says the government can further promote the development of this industry by providing super tax deductions of 150 per cent for qualifying research and development expenditure on projects, which would not qualify for rebates under the R&D Cash Rebate Scheme.

Singapore has already proposed in its 2010 budget super tax deductions of 250 per cent for the first S$300,000 (HK$1,663,890) of qualifying expenses for the years of assessment 2011 to 2015.

Alternatively, taxpayers are allowed to convert up to S$300,000 of such tax deductions into a non-taxable cash grant of up to S$21,000.