Reform that will see HK$5 billion in tax breaks for start-ups and small businesses to go before Legislative Council in 2018

Proposal to forgo HK$5 billion in revenue to help small businesses greeted with hope and caution

PUBLISHED : Wednesday, 16 August, 2017, 8:01pm
UPDATED : Thursday, 17 August, 2017, 4:12pm

Hong Kong could see its first major profits tax reform aimed at easing the burden on smaller businesses take effect in the second half of next year, the financial services and treasury bureau chief said on Wednesday.

James Lau said the overall economic benefits would outweigh the lost tax revenues – estimated to be about HK$5 billion annually – as the money would be better used in the market than in government coffers.

Chief Executive Carrie Lam Cheng Yuet-ngor proposed a two-tier tax system in her election manifesto that would lower the tax rate for the first HK$2 million of profits to 10 per cent, from the current 16.5 per cent.

Details of the proposal could be announced before October, when she is due to deliver her maiden policy address.

I hope Legco can see the pluses
financial services minister James Lau

Lau said the administration planned to submit a bill for legislative approval in the second half of next year.

“I wouldn’t say it’s necessarily easy to gain passage, but I think we’ll be able to explain [the economic benefits] and get support from the Legislative Council,” Lau said.

He expressed confidence despite a deeply divided Legco, where opposition pan-democrats have regularly filibustered bills as part of a widening political rift with their pro-establishment colleagues and the government.

Lau said the lower tax rates would allow small and medium-sized enterprises and start-ups to invest the money they saved from tax expenses in developing new technologies, and fuel the growth of innovative industries.

“We consider the HK$5 billion an investment,” he said, adding the money would have a “multiplying effect” on the economy when it was put in the market.

“There might be considerations on the scope of the concessions, on whether we are too restrictive, whether we should be doing something else,” he said. “But I hope Legco can see the pluses.”

Opposition lawmakers have thus far not voiced objection to the proposal, with some even stating they supported the government’s efforts to ease the burden on SMEs.

But accountancy sector lawmaker Kenneth Leung warned a new tax system might create loopholes for tax avoidance.

Leung said applying the two-tier system to all companies might prompt some large ones to split their businesses into smaller subsidiaries. This would be done to enjoy a lower tax rate.

Tax breaks in store for Hong Kong start-ups as city struggles to stay competitive

“The policy direction needs to be clearer,” he said.

But Leung said he backed the idea of cutting taxes in general given the city’s ample financial reserves.

Hong Kong recorded a HK$92 billion surplus for the financial year 2016-17, and total reserves are on track to hit HK$952 billion by March.

Civic Party lawmaker Alvin Yeung Ngok-kiu endorsed the general policy direction, but said officials needed to explain the proposal in greater detail, such as how the HK$2 million threshold was calculated.