Critics say the law changes will erode Hong Kong's attraction to investors The government expects a windfall of tens of billions of dollars to help cut its budget deficit after amendments designed to combat 'aggressive tax avoidance schemes' was passed yesterday. But the Legislative Council's approval of the amendments, which the government says will plug loopholes in the law on the deduction of interest expenses and royalty income for profits tax purposes, has been decried by business representatives as eroding the attractiveness of Hong Kong to investors and damaging the debt market. The Democratic Party came out in full support of the changes in a rare alliance with the pro-government Democratic Alliance for Betterment of Hong Kong. But lawmakers from the pro-business Liberal Party expressed reservations on the most controversial provisions, while legislators for the accountancy and real estate sectors slammed the amendments as ill-conceived, out of line with Hong Kong's reputation as a 'fair and just society' and discriminatory against 'the rich'. Secretary for Financial Services and the Treasury Frederick Ma Si-hang said tax avoidance made possible by the loopholes in the Inland Revenue Ordinance had cost the government $6.7 billion in lost revenue between 1997 and this year. Plugging the loopholes would bring a windfall of tens of billions over the years, he added. The Inland Revenue (Amendment) Bill 2000 bars deductions for interest payments arising from circular borrowing so that companies cannot gain deductions by creating artificial interest expense streams, issuing debentures and subscribing to them through associates. Another provision relates to royalty income and springs from a 1999 Court of Final Appeal decision that judged as non-taxable any royalty payments attributable to goods manufactured outside Hong Kong. 'If the ordinance is not amended, huge amounts of tax revenue will be at stake,' a Financial Services Bureau spokeswoman said. 'The loss may increase in multiples as and when more enterprises are aware of this ruling and take advantage of it to reduce their tax liability, given that most of our manufacturing base has been relocated outside Hong Kong.' Abraham Razack, of the real estate and construction constituency, said the amendments would 'unnecessarily restrict legitimate business practices, incite antagonism and weaken investor confidence'. 'The administration cannot find new means of solving the fiscal deficit and figures it can squeeze more funds from the rich - they have lots of money, why don't we rob them?' Mr Razack said. 'The amendment ... discriminates against the debt market, infringes the rule of law and the guiding principle of equality, which is a core value of our society.' Mr Razack said the bill would ruin Hong Kong's reputation as a world financial centre. He also criticised the Democratic Party for supporting the bill as it was unlikely to affect the working class. 'This just shows how the government is making use of your party to achieve its goals,' he said during debate on the bill. 'This time they are wrong and you are too.' Accountancy representative Eric Li Ka-cheung said: 'This amendment could confuse serious investors, could lead to wasteful litigation and breaches the territorial source principles,' referring to Hong Kong's territorial-based tax system that does not tax profits from offshore trade. The new rules will take effect from the 2004-05 tax year.