Competing claims for slice of Treasury cake

ONE of the first and possibly most contentious choices faced by the incoming government is how to divide up income generated by the Hong Kong Treasury.

Should the community benefit more, or should Hong Kong's rather small taxpaying population be entitled to a bigger share of the 'dividends'? No announcement has yet been made that the SAR Government is going to spend the surplus, but expectation is high that a spending spree will feature prominently in Chief Executive Tung Chee-hwa's first policy speech.

As Mr Tung has promised Hong Kong people he will strive to improve social services after taking over the helm, the community expects him to commit more funds to housing, and to improvements to the education system and welfare for the elderly.

Apart from social spending, Mr Tung has impressed on the business community that he will also try to improve the investment environment since he fully appreciates the need to maintain Hong Kong's competitiveness.

Professionals, executives and managers - the class that has contributed so much and formed the bulk of the salary taxpayers - are also looking to Mr Tung for a fair share if tax benefits are on the SAR Government's agenda.

Clearer signals are now emerging that tax concessions will form a key part of the largesse Mr Tung is preparing to dispense.

Over the past few months officials are said to have strongly hinted to the business sector that corporate tax will be reduced, a gesture much welcomed by the business community.

A keen supporter of lower corporate tax, Marshall Byres, has suggested the SAR Government issue a statement of intent to lower the corporate tax rate, a gesture to boost Hong Kong's competitiveness.

Citing the present 16.5 per cent profits-tax rate as too high, Mr Byres said: 'I believe that Hong Kong should as a matter of policy be striving for a 12 per cent [corporate] tax rate.

'Companies come and go. If the Government keeps reaffirming that it's going to lower the tax rate . . . it is more attractive than a tax holiday and it has a much more significant impact on multinational corporations to spend more here and commit [themselves] more here.' In his view, the reduction could be spread over several years - first lowering the rate to about 15 per cent and from then on gradually down to 12.

'Reducing corporate tax rate has a lot of merits: it gives more money into corporations and it tends to create more employment. Companies won't sit on cash, they are going to spend it,' said Mr Byres.

Noting that one percentage point of profits tax yield equalled $2.6 billion, he said a reduction of 1.5 percentage points would be worth only $3.9 billion.

George Leung Siu-kay, of Hongkong Bank, agreed the tax rate should be lowered.

'The trend in the Asia-Pacific rim is towards further deregulation and further reduction of tax rates: they are getting more attractive to foreign investors,' said Mr Leung.

'If Hong Kong were to go against the trend and raise taxes instead, it would only further undermine our competitiveness.' Mr Leung was also cautious about how far Hong Kong should go in reducing corporate tax. Lowering the corporate rate to 15 per cent was acceptable, based on the Government's current financial strength.

But, if it were to be further reduced to 10 per cent or 12 per cent, Mr Leung said, the Government needed to do a cost-benefit analysis to see how that would affect fiscal reserves.

'The effect of tax cuts is permanent. It is easy to reduce it but difficult to raise it. Once it's done, the Government's income will be lowered,' he said.

Apart from a corporate tax cut, business could be offered the concession of an adjustment to the depreciation allowance.

But Mr Leung maintained that the need for cuts in corporate tax was more pressing than personal tax concessions.

Compared with other parts of the world, he said the 15 per cent standard rate charged by the Hong Kong Treasury was already quite low.

While lowering the standard rate would attract expatriates and professionals to work here, improving the investment environment to boost Hong Kong's competitiveness was of greater importance to Hong Kong itself.

Yet Mr Leung agreed that, if the Government had the capability, it should consider giving the sandwich class some priority in personal tax cuts.

Other options, apart from reducing the 15 per cent rate, could benefit salary earners, said Mr Byres, citing increases in personal allowances and rationalising of tax bands. There should also be more emphasis on indirect taxes.

While the world trend is towards a greater emphasis on indirect taxes, the community's resistance to introduction of a sales tax a few years ago forced the old Government to shelve the idea.

To date, there has been no sign of government interest in reviving the discussion as it has more than enough money in the kitty already.

But Mr Byres saw merit in studying the need for some value-added tax (VAT).

'We have to consider that. When we get to the first decade of the 21st century, we need to give long, hard thought to introducing it again. We have time to watch the world,' he said.

Obviously, when other countries introduced or increased VAT, it had an impact on the way they levied direct taxes. The outcome could be a further reduction in corporate tax rate.

But surely Mr Tung's more urgent priority during his first few months in the hot seat is to devise a reasonable system of distributing handouts.

In the end, analysts believe he will be even-handed - giving both the community and the taxpayer a little something.

Given Mr Tung's repeated promise to improve social policy, extra spending on education, welfare and housing is inevitable, the only question being whether his handouts will meet the community's aspirations.

On balance, businesses are likely to get the more favourable deal, given Mr Tung's commitment to improving the investment environment.