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With the 2001 budget soon to be unveiled, experts believe Hong Kong's growth as an e-commerce hub could be encouraged by providing significant tax relief.

Yvonne Law, deputy tax managing partner of Deloitte Touche Tohmatsu, believes a raft of new measures could help put the SAR on the map as a high-technology hub.

Among these were double deduction for expenditure on approved information technology related consulting work and e-commerce staff training and 'an outright tax deduction for capital expenses incurred in setting up e-businesses'.

Carrie Yau Tsang Ka-lai, Secretary for Information Technology and Broadcasting, agreed that Hong Kong may need to reassess its outlook towards attracting and nurturing hi-tech enterprise.

Delivering a speech at the annual Hong Kong networking dinner at the World Economic Forum in Davos, Switzerland, Mrs Yau said: 'I firmly believe our future development is closely tied to leveraging the information age.

'The major new areas of economic growth will be in the telecommunications, IT and multimedia sectors.'

Mrs Yau said major training and re-training programmes were needed to cope with the shortage of IT talent.

'In particular, we need imaginative educational initiatives to avoid bottlenecks in the supply of IT talent,' she said. 'We must also ensure high levels of bilingualism in our education system.'

Tax consultants said other measures which could be adopted were salaries tax deductions for the purchase of computers and Internet services for IT training. Hong Kong has had problems producing enough skilled IT workers and this kind of tax relief could stimulate industry growth.

'It's about time we put something into action to solve the IT manpower supply problem,' said Mrs Yau.

The growth of e-commerce is also expected to pose new challenges for Hong Kong's tax principles.

'Existing legislation does not cater for the virtual economy,' said Ms Law.

Her view follows an announcement by the Organisation for Economic Co-operation and Development that online businesses will soon have to consider the taxation implications of where their equipment is located.

Hong Kong taxes company profits on the basis of source, with the permanent establishment of an office being the key concept. This is inapplicable to trade or sales made over the Internet, where buying and selling locations are difficult to define.

'New rules are clearly needed, but any review needs to be on a global basis,' Ms Law said.

Tax specialists from PricewaterhouseCoopers have also joined the ranks of those calling for the Inland Revenue Department (IRD) to consider the revenue issues raised by e-commerce. Colin Farrell, leader of the company's Asia Pacific e-business tax team believes that the IRD's deeming provisions on taxability need to be clarified in this regard.

'The OECD decision may simply increase the local need for a statement on this matter by the IRD,' said Mr Farrell.

A report on Hong Kong's tax base is forecast to be released at the end of November. With this in mind, Financial Secretary Donald Tsang Yam-kuen is unlikely to make any wholesale changes to the SAR's tax system. Speculation has mounted that Hong Kong needs a wider tax base, particularly given last week's forecast of a HK$13 billion budget deficit. Mr Tsang had forecast a budget deficit of HK$6.2 billion and the massive increase has been widely attributed to the sluggish property market. Land auction proceeds have failed to meet targets, and stamp duty is also unlikely to meet expectations.

Deloitte has called for a review of stamp duty and believes the levels may need adjustment. It recommends lowering stamp duty on the transfer of shares to 0.2 per cent from the present level of 0.225 per cent.

Joseph Wong, a tax partner at Deloitte, believes the diminishing sources of revenue do not necessarily call for an overhaul of the direct tax system in Hong Kong.

'The direct tax system in Hong Kong is working well,' said Mr Wong. 'We predict no change in salaries, profits or property tax.'

However, he does believe a review of estate duty would be a good idea, as one way for the Government to increase revenue.

Ms Law feels a comprehensive review of the tax base at a macro level is necessary for a number of reasons. She argues that the sources of income would be stabilised and the possibility of a deficit would be reduced. Additionally, a review should enhance the long-term economic and civil development of the SAR. Ms Law believes it is too early to consider launching a sales tax due to the prevailing economic environment, and administrative concerns.

If a sales tax were deemed necessary, Ms Law thinks it should meet a number of criteria.

'It should be a low flat rate, for example 2 per cent to 3 per cent. It should be exempt for necessities and there should be a corresponding decrease in direct tax.'

Another suggestion put forward by Ms Law was a review of the indirect taxes. Rates and betting duty are two such taxes. Both online and illegal betting activities do not bring in any taxation revenue.

Other indirect taxes that Ms Law believes need reviewing are environmental taxes and taxes relating to port facilities and cross-border transport systems.

IT clock ticking, Page 6



Experts say overhaul of e-commerce sector needed to put SAR on map as hi-tech hub