Chief executive’s policy address 2017

Tax breaks and R&D touted to keep Hong Kong competitive as Carrie Lam delivers policy speech

Government will also develop new convention venues but scrap unpopular plan to raze Wan Chai Sports Ground

PUBLISHED : Wednesday, 11 October, 2017, 9:03pm
UPDATED : Thursday, 12 October, 2017, 6:33pm

Lower taxes on profits, tax deductions for businesses that invest in research and development (R&D) and the expansion of conference space in a prime area of Hong Kong were announced by the city’s leader on Wednesday, as she seeks to diversify the economy and draw more investors from abroad.

In announcing these measures in her maiden policy address on Wednesday, Chief Executive Carrie Lam Cheng Yuet-ngor offered an optimistic view on the city’s growth, saying that she expected it to be higher than 3.5 per cent. An earlier forecast estimated that growth would be between 3 and 4 per cent. Average growth in the past decade has been 2.9 per cent.

Lam went beyond her election promises by delivering tax benefits that were more generous than expected.

“We should strategically utilise our tax measures to enhance Hong Kong’s competitiveness by promoting the development of our industries and economic diversification,” said Lam, noting that Hong Kong was facing “increasingly grave challenges” from global competition and the rise of protectionism.

Companies will soon pay tax of 8.25 per cent on the first HK$2 million of profits, down from the existing flat rate of 16.5 per cent. Profits above HK$2 million will still be subject to the 16.5 per cent tax rate. Lam had initially suggested reducing the figure to 10 per cent when she was running for election earlier this year.

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

A government source told the Post that unincorporated businesses – which make up only a fraction of all companies in Hong Kong – will see their profits tax rate halved to 7.5 per cent for the first HK$2 million, down from the current 15 per cent.

The source said that with the cuts, the government would forego HK$5.8 billion in tax revenue each year – about 4 per cent of the annual profits tax revenue. But it can bear this shortfall, given that the city’s fiscal reserves are in excess of HK$1 trillion, said the source.

In her speech, Lam made clear that the tax cuts were aimed at helping small businesses. She said there would be restrictions to ensure that only one firm within a group of enterprises can benefit from the lower tax rate. This addresses a concern that economists had, that businessmen may divide their companies into smaller entities so that each entity could enjoy the tax cut.

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

Still, economist Andy Kwan Cheuk-chiu was not impressed, pointing out that companies with more staff would not benefit as much.

“If the company has five employees, then you do the maths … the actual benefit is not that great,” he said.

However, Curtis Ng, who is vice-chairman of the Hong Kong Institute of Certified Public Accountants’ taxation faculty executive committee, said the cuts were a “bold” move. But the government needs to consult stakeholders to come up with a plan that ensures the benefits are not abused, he added.

Lam also announced tax breaks for companies that invest in R&D, which she wants to implement next year. For the first HK$2 million, companies can get a 300 per cent tax deduction. For expenditure beyond the HK$2 million benchmark, there will be a 200 per cent tax deduction.

Currently, companies get only a 100 per cent deduction for R&D expenses. This means that a company with HK$10 million in profit but HK$5 million in R&D expenses would be deemed to have an assessable profit of HK$5 million. It would need to pay HK$825,000 in tax.

But under the new policy, the same company would be considered as having spent an amount greater than its earnings on R&D and would not have to pay any tax on its profits.

Lawmaker for the accounting sector Kenneth Leung was sceptical about the new policy. The deduction will help profitable companies but not those that are struggling, he said.

“What we want is more resources to give (loss-making companies) a boost,” he demanded.

Meanwhile, Lam announced a reversal of the previous government’s plan to redevelop the popular Wan Chai Sports Ground into a new exhibition centre, to meet the need for convention venues.

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Instead, her administration will demolish three government buildings next to the Hong Kong Convention and Exhibition Centre and build a new wing with 23,000 square metres of space.

“The convention and exhibition industry is crucial to Hong Kong as an international centre for commerce and trade. By attracting world-class and the most prestigious international conventions and exhibitions to Hong Kong, we have reinforced our position as an international hub,” Lam said.