Call to introduce tax relief for Hong Kong business groups as part of reform

Study group proposes system used overseas as a way for city to stay competitive, but critics warn of abuse

PUBLISHED : Monday, 11 September, 2017, 8:12pm
UPDATED : Monday, 11 September, 2017, 11:40pm

A top government financial advisory body has proposed to allow business groups in Hong Kong to transfer losses among their subsidiaries as part of a planned reform to encourage innovation in companies through tax relief.

The move comes ahead of Chief Executive Carrie Lam Cheng Yuet-ngor’s expected announcement of tax incentives for smaller firms.

On Monday, the Financial Services Development Council unveiled the results of a study of group tax loss relief in 22 countries. The system allows a corporation to transfer the losses of its subsidiary to offset profits from other branches in the group, so that the company is taxed less as a whole.

Council chairwoman Laura Cha Shih May-lung said many developed countries had adopted the system and Hong Kong needed to catch up to stay competitive.

Currently in Hong Kong, losses incurred by a company can be carried forward to offset its own future profits, but transfer to other profitable subsidiaries within the business group is not allowed.

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“Alongside its study on the implementation of a two-tier tax plan, the government could consider the feasibility of introducing a group tax loss relief system,” Cha said.

In her manifesto, Carrie Lam had proposed a “new direction” for tax policies, including the two-tier system to reduce the burden on enterprises, as well as additional tax breaks to encourage research and development.

While the council’s proposal was welcomed by the business sector, critics warned it only favoured big corporations and could lead to abuse. Other concerns include administrative complexity for the government.

In a statement on Monday, the Financial Services and the Treasury Bureau said: “We note the report released by [the council], and will examine the proposals set out.”

KPMG China managing partner Ayesha Macpherson said the council’s proposal was “a step towards modernising Hong Kong’s tax system”, citing Singapore, where group tax loss relief was introduced in 2003.

“Hong Kong cannot simply rely on its low taxes to stay globally competitive, particularly when its 16.5 per cent corporate tax rate can’t be considered very low based on international developments,” Macpherson said.

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The corporate tax rate in Singapore and Taiwan is only slightly higher at 17 per cent while the UK has a rate of 19 per cent. The global average stands at 24.3 per cent, according to data compiled by KPMG.

However, economist Terence Chong Tai-leung, executive director of Chinese University’s Lau Chor Tak Institute of Global Economics and Finance, said: “If a company is doing badly and it suffers losses, why should we taxpayers subsidise it? The arrangement could easily be abused to evade tax.”

He also argued that the system was commonly adopted overseas because many countries had very high tax rates, noting that the corporate tax rate in America was almost 40 per cent.

Lawmaker Jeffrey Lam Kin-fung, who represents the Hong Kong General Chamber of Commerce in the legislature, dismissed Chong’s concerns.

“Such transfer of losses will have to be reported and audited. It won’t encourage tax evasion but instead make the business group’s accounting more transparent,” Lam said.

He added that he believed corporations would be more willing to invest in research and development if the relief system was in place.