Chief executive’s policy address 2017

Small businesses and start-ups in Hong Kong need more than tax breaks to thrive, owners say

In the final part of a three-part series on Hong Kong leader Carrie Lam’s eagerly awaited maiden policy address, to be delivered on October 11, small-business owners welcome Lam’s expected plan to cut taxes, but say more needs to be done

PUBLISHED : Friday, 06 October, 2017, 8:03am
UPDATED : Friday, 06 October, 2017, 2:25pm

Arnault Castel, who owns a small business in Hong Kong, already has plans for the money he will save from a tax cut that the city’s leader is expected to announce next week.

Castel owns seven lifestyle stores in the city under the Kapok brand, the first of which he opened in 2006. He said he planned to use the tax break to invest more in his employees.

“If I have a tax saving it may be easier for me to retain some good employees by paying them better salaries,” Castel, a French citizen who has lived in the city for 21 years, said.

Hong Kong business owners will be closely monitoring Chief Executive Carrie Lam Cheng Yuet-ngor’s maiden policy address on Wednesday, when she is expected to fulfil an election campaign promise that could ease the burden on entrepreneurs.

Lam proposed reducing the tax rate for small businesses on the first HK$2 million of profit to below 10 per cent, from its current 16.5 per cent. She repeated that pledge at a business forum in September.

“My intention is to reduce the tax burdens on start-ups and SMEs [small and medium-sized enterprises], but to do it without changing the very simple tax system,” she said at the forum.

The move is seen as a way to make Hong Kong more attractive for businesses and to compete against regional rivals such as Singapore.

In Singapore, the corporate tax rate is 17 per cent, but the city state offers rebates to help ease the burden. It also offers full and partial tax exemptions for start-ups, limited to S$300,000 (HK$1.7 million) in taxable income.

If Hong Kong’s rate is lowered to 10 per cent, the government is set to lose about HK$5 billion in annual revenue, according to Financial Secretary Paul Chan Mo-po.

That would hardly dent Hong Kong’s massive fiscal reserve of about HK$1 trillion, but the savings for small businesses may help them reinvest or ease their costs.

Tax incentives for Hong Kong SMEs will only create more jobs for government paper shufflers

Federation of Hong Kong Industries chairman Jimmy Kwok Chun-wah said any tax cut would encourage more investment, especially for start-ups. He added that it could spur employees to become employers by emboldening their entrepreneurial spirit.

“Other than tax reform ... a 200 per cent tax rebate on revenue for research and development” was another measure that may help small businesses and start-ups grow, he said.

When we are dealing with the government it’s not very free, it’s very bureaucratic actually
Arnaud Castel, small business owner

But accountancy sector legislator Kenneth Leung said the tax reduction, while “headline-attracting”, would not result in large savings for SMEs.

“Companies will benefit from tax savings of about HK$130,000 for those making the full HK$2 million, but many small enterprises don’t necessarily make HK$2 million taxable profits,” he said.

“In order to help the SMEs, a lot of other things need to be done, including overhauling our education and training system so we have more well-trained graduates or non-graduates to fill the job market.”

And while business owners welcomed the tax break, some agreed with Leung that there was more the government could do to improve the local business climate.

Castel said the government needed to look at ways of streamlining bureaucracy, which he said was hindering his company’s growth.

“On the one side, [the tax break] is a good thing but it’s kind of the easy way out. We always hear that Hong Kong is a very free economy with a low tax rate ... but when we are dealing with the government it’s not very free, it’s very bureaucratic actually,” Castel said.

When he applied to join government business programmes or initiatives,he said, the amount of paperwork and the complexity of the process were “discouraging”.

Why is it so difficult for small businesses to open an account at some banks in Hong Kong?

Access to funding to help boost his business was also an obstacle, he said. Castel said that getting both public and private funding in France was much easier than in Hong Kong, where the difficulty of accessing the cash stops some companies from expanding.

“There should be targeted help for SMEs and also understanding that we are usually very busy [and] understaffed, and things should be made very simple for us,” Castel said.

Leung said he believed the government was only offering “piecemeal solutions” and was not doing enough to help Hong Kong evolve into a technology hub.

Capital investment would be more beneficial for new start-ups, as well as tax exemptions or incentives for private equity funds to help them invest in Hong Kong-based start-ups, he said.

Other business owners said tax cuts on profits would not help start-ups – which the government is trying to promote – since most do not register any profit initially, or even for a few years.

“Usually, when you’re first setting up a business, profit tax is not something which is first and foremost on your mind. Usually it takes a couple of years before you actually turn a profit,” said George Harrap, chief executive of remittance start-up Bitspark.

Timothy Yu Yau-hin, founder of start-up Snapask – a platform which helps students get personalised help with their after-school studies – believed that the talent shortage could be traced to Hong Kong’s education system which places its focus on more traditional study fields.

“In terms of growing talent ... the government can do a lot more to grow people outside of the financial system and more into the tech [field] with a more diverse skill set,” Yu said.

Read the first part of the series here and the second part here.