Hong Kong Budget 2017-2018

Hong Kong Financial Secretary Paul Chan announces review of city’s narrow tax base ‘problem’

He calls for review of ‘international competitiveness’ of current system in an attempt to attract business from regional rivals

PUBLISHED : Wednesday, 22 February, 2017, 11:26pm
UPDATED : Thursday, 23 February, 2017, 1:05pm

Financial Secretary Paul Chan Mo-po on Wednesday announced a new policy unit would be established in an effort to review Hong Kong’s tax regime and narrow the city’s tax base.

In handing down the 2017-18 budget, Chan revealed his plan to widen the salary tax bands, introduce new rebates and increase ­allowances on the back of an estimated HK$92.8 billion fiscal surplus for the current financial year.

He warned, however, the city was vulnerable to volatility in the global economy and financial markets, with 45 per cent of government revenue in 2015-16 coming from land sales and profits tax alone.

He said a tax policy unit would be set up under the Financial Services and the Treasury Bureau to review the city’s tax policies and address such issues.

“We should be mindful of our narrow tax base, the concentration of revenue from a few industries and volatility of government revenue in response to economic fluctuations,” Chan said.

Hong Kong review vital to overcome problems with narrow tax base

“We cannot propose a tax cut that erodes our revenue base. Neither can we adjust our tax rates frequently, as this would affect the predictability of our tax regime and dent investor confidence. We must examine the international competitiveness of our regime and address the problem of a narrow tax base.”

During question time with the media Chan was asked the direction of the tax review and if a progressive profits tax or a goods and services tax would be introduced to broaden the base.

Broadening the tax base would, not be the unit’s short-term goal, Chan responded.

He said the unit would first focus on how the tax regime could be amended to bolster certain industries, raising the possibility of tax concessions for information technology, research and aircraft leasing companies.

“If we do more, we can compete with Singapore and capture their market (of aircraft leasing business),” a government source said regarding tax concessions.

Paul Ho Yiu-po, a financial services tax partner at Ernst & Young, said GST could guarantee a stable source of government revenue even during economic downturn. But to alleviate the burden on the public, basic commodities such as bread, vegetables and milk could be exempted.

In 2001, a government-appointed committee floated the idea of a GST as just one way the city could broaden its tax base.

Chan also announced yesterday that the salaries tax bands would be widened from HK$40,000 to HK$45,000, a move that will benefit about 1.3 million taxpayers, but reduce tax revenue by HK$1.5 billion per year.

Electric car buyers to pay more as tax waivers see big reduction in Hong Kong budget

Other announcements included an increase to the disabled dependant allowance from HK$66,000 to HK$75,000; an increase to the dependent brother or sister allowance from HK$33,000 to HK$37,500 and an expanded entitlement period for home loan tax deductions to 20 years of assessment.

Salaries tax and tax under personal assessment, as well as profits tax will all be reduced by 75 per cent and each be subject to a ceiling of HK$20,000. Property rates up to HK$1,000 per quarter will be waived for each rateable property for the full 2017-2018 financial year.

Eunice Fung, a Hongkonger, who earns about HK$1 million per year, said the concessions did not impact on her livelihood.

As she is not married, she could only benefit from the personal allowances and the dependent parent basic components. In the coming financial year, she would have to pay HK$106,240 in salaries tax, down from HK$107,740 this financial year.