SMEs stand to profit from proposed new tax regime in Hong Kong

Industry professionals see more upside for business than a loss in public finances in Chief Executive Carrie Lam’s proposal to introduce a two-tier tax profits regime to reduce companies’ burden.

Businesses with an annual profit of less than HK$2 million would see their tax cut from 16.5 per cent to 10 per cent in terms of the proposal – a move that is expected to relieve the burden on small- and medium-sized enterprises (SMEs). Industry leaders say this would be likely to substantially benefit SMEs with minimal impact on public finances.

William Chan, tax partner at Grant Thornton Hong Kong, says there is “always an argument that a reduction in tax may lead to an increase in investment and economic activities which would in turn raise tax revenue. The business community would welcome a reduction in tax as most businesses are SMEs, so this would benefit them the most.”

Caesar Wong, managing director of China Business Services at RSM Hong Kong, says: “Although Hong Kong is a remarkably successful economy, a surprisingly small number of companies contribute to public tax.”

According to the “public consultation on the 2017/18 budget”, only about 9 per cent (100,900) of the 1,149,000 registered corporations in 2014/15 paid tax. “More than one million companies did not need to pay profits tax,” Wong says. “About 86 per cent of profits tax was contributed by the top 5 per cent taxpaying corporations – about 5,000 companies. More than 67 per cent of the profits tax was paid by 1,000 companies.”

Chan agrees. “According to the Research Office of the Legislative Council Secretariat, the profits tax collected by the government in the 2016/17 financial year was HK$139.2 billion, or 24.3 per cent of the total revenue, “Chan says. “The profits tax is forecast to be HK$139.0 billion for the 2017/18 financial year or 27.4 per cent of the total revenue. A reduction in the profits tax rate would have a major impact on public finances.

“The government should also consider the carry[ing] back of losses for perhaps two to three years,” Chan says, “so that when companies encounter difficult times one year they can take advantage of this and have a tax refund to help them rather than wait for the following year to offset the losses.

“Cash flow is very important to the survival of businesses. Although Hong Kong offers a generous tax depreciation regime, the government could introduce additional tax depreciation for research and development [R&D] expenses and the use of hi-tech equipment to promote R&D and hi-tech industries.”

Chan sees room for support in growing small start-ups. “R&D is not confined to large companies,” he says. “We need to think about providing competitive tax incentives to encourage more start-up business and R&D activities. China has reduced the effective tax rate for qualified small-and-low-profit enterprises with an annual taxable profit up to 500,000 yuan (HK$598,238) to
10 per cent only for 2017-19. If the government can help SMEs and start-ups to save operational costs or offer subsidies during their infancy, that could be more helpful for taxpayers.”