Tax cuts welcome, now cut red tape too

The government plans to ease the burden on a sector that employs almost half of the non-public workforce, and the bureaucracy should also look to see how it can contribute to prosperity

PUBLISHED : Sunday, 20 August, 2017, 12:57am
UPDATED : Sunday, 20 August, 2017, 12:57am

Small and medium-size businesses are the lifeblood of the private sector. Any plan to help them prosper and to promote competitiveness in our economy is welcome. In the first major profits tax reform in a decade, the government is preparing a two-tier profits tax system under which the tax rate for SMEs for the first HK$2 million of profits will be lowered to 10 per cent from 16.5 per cent.

At a time of prohibitively high rents that have killed many a small business, the proposal should be a shot in the arm. The tax reform was part of Chief Executive Carrie Lam Cheng Yuet-ngor’s election platform. In his maiden budget in February, Financial Secretary Paul Chan Mo-po also pledged to set up a tax policy unit to examine the competitiveness of our tax regime. Subject to legislative approval, Lam’s proposal is expected to take effect in the second half of next year and is part of a step-by-step review of the whole tax system.

According to Trade and Industry Department figures, there are about 320,000 SMEs in Hong Kong, accounting for 98 per cent of the city’s total businesses and employing some 1.3 million people, almost half of the workforce if we exclude the civil service.

Hong Kong set to forgo HK$5 billion in tax revenues after reform to ease burden on SMEs: finance chief

The government is expected to forgo HK$5 billion in tax revenue per year, or 3.8 per cent of the total amount. But it can well afford the tax cut as the public coffers are overflowing with a HK$92 billion surplus from the last financial year, while total reserves are on track to reach HK$952 billion by March.

But while welcome, one should not ignore potential pitfalls from such a drastic tax cut. Companies in other countries have been known to exploit loopholes in any two-tier taxation system to pay less tax. These range from the relatively benign, such as keeping staff headcounts low, to actively cooking the books. The taxman must keep an eye on any tax avoidance stemming from the new regime.

But more importantly, one should not exaggerate the positive effects of such a tax cut. Economists have often pointed out that any tax savings often end up lining the pockets of bosses and their shareholders. In other words, the money saved does not necessarily go towards expanding the business, hiring more staff, paying higher wages or enhancing services for customers. Such studies, however, were mostly conducted in response to the decades-long campaign of cutting taxes on big corporations and the wealthy advocated by US Republican politicians. In Hong Kong, high rents and unpredictable rent rises have been our own peculiar killer of businesses. So the proposed tax cut may be more defensible as it will provide a greater margin of safety for SMEs.

In the meantime, government departments should reduce bureaucratic red tape. That may help businesses even more.