Rules need to be updated

PUBLISHED : Thursday, 19 April, 2012, 12:00am
UPDATED : Thursday, 19 April, 2012, 12:00am


Hong Kong should make better use of its tax system to raise its competitiveness as a regional business hub and attract more foreign investment.

'Hong Kong's tax system is quite outdated in the sense that [its] skeleton is still based on old thinking: Hong Kong as a manufacturing city and not a financial services hub,' says Fergus Wong, co-chairman of the tax sub-committee at the Association of Chartered Certified Accountants Hong Kong.

'The government needs to update the system and make it more relevant for today's environment, taking into consideration the shift of economic power from west to east, changes in the tax regimes of neighbouring countries, and Hong Kong's own fundamental economic changes.' The Hong Kong system has, since its launch in 1947, been revised three times, with the last revision in 1976.

'While our business community has adapted to the monumental shift in the global economy, our tax system has remained largely the same for the past 35 years, and we believe the time has now come to undertake a comprehensive review,' says Loretta Shuen, the taxation committee chairwoman at CPA Australia, Greater China.

Many countries in the region, including the mainland, Singapore and India, have diligently updated tax rules in recent years to cope with changing global economic conditions, she says.

Areas that need to be addressed in Hong Kong include an overall deduction in profits tax for small and medium-sized enterprises (SMEs) and listed corporations, and better tax incentives to encourage more companies to invest in the city.

CPA Australia has recommended offering a reduced tax rate and a tax holiday to foreign companies setting up regional headquarters in Hong Kong. 'There are about 1,340 foreign companies with their regional headquarters in Hong Kong. This number is very small compared with the total number of businesses in Hong Kong,' Shuen says.

Companies establishing their regional headquarters in Hong Kong should also be able to enjoy a 100 per cent tax exemption until 2015, together with a reduced profits tax rate of 10 per cent up to 2020, according to CPA Australia, Greater China's recommendations.

'We believe such measures would help Hong Kong's economic and business growth, ensuring sustainability even in an economic downturn,' Shuen says.

The Hong Kong Institute of Certified Public Accountants (HKICPA) has, meanwhile, recommended the Inland Revenue halves the period in which it can review and assess a company's tax matters. 'A lot of businesses don't mind paying profits tax, but they like certainty, and to know exactly how much tax is owed. We think the current period under which a company's tax matter can be reviewed is too long. We recommend this to be shortened to three years,' says Ayesha Lau, the HKICPA's taxation committee chair.

The government should also widen its tax-loss relief provision to corporate groups from the existing arrangement where losses can only be carried forward within one single entity, she adds.

Meanwhile, SMEs, which account for almost 98 per cent of all Hong Kong's businesses, employing an estimated 40 per cent of the working population, also deserve notable tax incentives, according to CPA Australia's tax review survey conducted in January.

'Our survey found widespread support for the profits tax rate for SMEs to be lowered to 13.5 per cent from the current 16.5 per cent. A two-tier tax system whereby larger corporations are taxed at a different rate to smaller companies, is not uncommon elsewhere in the world,' Shuen says. SMEs should also be allowed to carry back losses for a period of two years, she says.

'These measure will help the finances of SMEs in an economic downturn. This is important as securing funding can be difficult for smaller companies, and we want to make sure they can survive in hard times,' Shuen says.

Though accounting bodies across the board have welcomed measures proposed in the government's 2012-2013 budget, they agree that most are focused only on the short term.

'The budget offers a lot of near-term relief for the city's families, but doesn't do enough to tackle long-term issues,' Lau says.