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Hong Kong economy

Hong Kong must promote research and innovation through incentives, says PwC

City at risk of falling behind neighbours because of lower expenditure on research but changes announced by chief executive offer hope, says consultancy

PUBLISHED : Tuesday, 31 October, 2017, 6:11pm
UPDATED : Tuesday, 31 October, 2017, 11:43pm

Hong Kong must catch up or risk falling further behind regional competitors when it comes to innovation and technology, according to consultancy PricewaterhouseCoopers.

“To encourage enterprises to move more R&D [research and development] back to Hong Kong, the government has to employ incentives – and tax incentives are an option,” said Charles Lee, the China south and Hong Kong tax leader at PwC.

“If we do not promote this kind of incentive, the comparative advantage for Hong Kong will be lower than other countries,” he said, noting that if further changes are not considered, companies will simply invest elsewhere. “They can always choose another place to spend on R&D.”

Since taking office as Hong Kong’s first female leader in July, Carrie Lam Cheng Yuet-ngor

has announced a raft of tax changes to guard against the “increasingly grave challenges” posed by global competition.

One of these is on the innovation front, where the city languishes in the middle of the pack. Hong Kong now ranks fourth behind the Asian innovations hubs of Singapore, South Korea and Japan – its lowest ever position, according to the Global Innovation Index.

In an attempt to spur further investment in innovation, Lam announced a series of tax breaks for companies that invest in research, to be implemented next year. Under the plan, companies can get a 300 per cent tax deduction on the first HK$2 million they spend – and a 200 per cent tax deduction on expenditure beyond the HK$2 million amount. Currently, companies receive a 100 per cent tax deduction for research expenses.

The city also lags behind regional competitors when it comes to GDP invested in research. Lam hopes to raise this figure to 1.5 per cent from the current 0.73 per cent.

In contrast, Japan’s expenditure on research is 3.3 per cent of GDP, while regional leader South Korea spends 4.2 per cent. Singapore and China spend 2.2 and 2.02 per cent of their GDP on research, respectively.

In South Korea, almost three quarters of research is performed by businesses, while in Hong Kong less than half is business-led, according to figures from the OECD.

“In Hong Kong, R&D is highly reliant on government spending and the private sector seems not so enthusiastic about investing,” said Roger Di, the China research and development investment services leader at PwC.

Industry groups have welcomed the changes announced by Lam. Curtis Ng, deputy chairman of the taxation faculty executive committee at the Hong Kong Institute of Certified Public Accountants, called the plan “very bold.”

“It is important to show that the government really intends to do something different.

“We haven’t seen that for many years.”

Further details of the tax incentives are expected to be announced over the coming weeks.