Numerous studies have consistently shown tax as a key factor in attracting business, funds and talent to a jurisdiction. Many countries around the world make use of the tax system to support growth of specific new industries. The tax system is a powerful tool to drive economic growth. Hong Kong’s new directions for taxation should include a more proactive use of its tax system to support growth, rather than merely using the tax system to collect government revenue.

Tax cuts ‘helpful’ only if companies earn a profit, says SME owner

It is a virtue for an individual or households to keep expenditures within income constraints. But a government can do the opposite by controlling its income within the needs of expenditure; a government should only collect taxes and other revenue up to the level required to fund needed public expenditures, because its objective is to maximise people’s welfare, using fiscal and taxation policies as tools, and not to maximise revenue or fiscal surplus.

Analyses presented at Monday’s Government Tax Summit showed Hong Kong’s economy at a turning point. The four traditional key industries – trading and logistics, financial services, tourism and professional services – are still the main pillars of the city’s economy and employment, but their combined share of gross domestic product declined from 60.3 per cent in 2007 to 57.2 per cent in 2016, and their share of employment has not grown in recent years.

However, to capture these opportunities, strategies and implementation plans must be put in place. These include adopting the right tax policies.

Beijing ‘losing no time’ to get input on blueprint for ‘Greater Bay Area’

The policy address announced the two-tier profits tax and the tax deduction for qualifying research and development expenditures. Other tax measures for immediate consideration include group tax loss relief, expansion of the offshore funds tax exemption, a tax incentive for regional headquarters, shortening the statutory period within which tax affairs are finalised, more double tax agreements – including with belt and road countries – and adding a personal tax exemption clause in double tax agreements for researchers.

Earlier this year, a tax policy unit was set up under the Financial Services and the Treasury Bureau. Coupled with the chief executive’s new direction, it is hoped that more attention will be devoted to tax policies so that Hong Kong’s economic growth can benefit fully from the support of its tax system.

Ayesha Macpherson Lau is managing partner of KPMG Hong Kong and was a panel speaker at the Government Tax Summit on October 23