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On the Horizon
Honing Hong Kong’s Strengths
Skyscrapers from below

The Chamber welcomes the Administration’s commitment to enhancing Hong Kong’s competitiveness through initiatives announced in the Chief Executive’s maiden Policy Address in October.

We should be vigilant about maintaining a balanced budget and amplifying our core strengths to sustain our position as a premier international business hub.

Particular emphasis should be given to maintaining our comparative advantage in areas where we are already ahead of the curve. Hong Kong has consistently ranked as one of the most competitive economies in the world due to our simple and low tax system, rule of law and efficient government. 

Although remedying shortcomings is warranted, these should not be made at the expense of honing our existing strengths. In the area of taxation, this means being mindful of developments in our backyard and beyond, and to act nimbly in taking pre-emptive measures to minimise the risk of marginalisation. 

HKGCC continues to advocate for the two overlapping issues of maintaining a balanced budget and intervening only when justified and as a last resort.

Our comments on policies to advance Hong Kong’s competitive edge are set out below.

A balanced budget and intervention/regulation only where necessary
Hong Kong has been running a budget surplus for the last 12 years. This is undesirable as it implies that the Government is collecting more money than it needs. We are therefore encouraged by the Chief Executive’s decision to adopt proactive measures to help Hong Kong become more competitive.

There have been calls for the Government to reinvest or return the money to the economy. We strongly urge the Government to give serious consideration to the latter and then the former, in that order of priority. This is because, despite the best of intentions, businesses and consumers are better placed to decide how resources should be allocated. 

The Government should adhere to the Basic Law principle of a balanced budget to avoid intervening in the market. It is encouraging to note that in his last Budget, the Financial Secretary emphasized the need to ensure that public spending must be fit for purpose  and, more importantly, to spend only when necessary and to act with prudence and strive for an overall fiscal balance over time.

We believe that this credo of small government should be upheld by the Administration so as to impart greater confidence to businesses. The Chamber is especially concerned about the rise in regulatory creep in recent years.

Sustaining international trade
Trade is Hong Kong’s lifeblood. Other than the Trade Facilitation Agreement in 2013, the Doha round of trade talks has come to a virtual standstill. This has given rise to a proliferation of bilateral and plurilateral trade agreements.

Hong Kong has, to date, signed six Free Trade Agreements (FTAs), 38 Comprehensive Double Taxation Agreements (CDTAs), and 20 Investment Promotion and Protection Agreements (IPPAs). The Chamber hopes that more resources could be deployed to expedite the expansion of Hong Kong’s treaty network. 

As pointed out in our previous submissions on potential CDTA partners, priority should be given to our top trading partners and jurisdictions along the Belt and Road Initiative.

The Chamber has previously written to the Government with recommendations on developing Hong Kong’s port, maritime and logistics capabilities, and is pleased to note that measures have been introduced to support these industries. However, more needs to be done to ensure there is adequate statutory backing to grease the wheels of trade.

The Chamber has been lobbying for a review of the Import and Export Ordinance to accommodate the unique nature of air-freighted transhipment cargo. Currently, the transhipment process is complicated by additional paperwork and procedures. These put HKIA at a disadvantage when compared to competing hubs. 

To strike a balance between the control of strategic commodities and enhancement of Hong Kong’s cargo hub status, the Government should consider such measures as eliminating trade declaration charges, streamlining the permits system, and reviewing import and export processing requirements.

Facilitating business
Helping business does not have to involve government spending. Companies would benefit from an operating environment that is not overly regulated. The Chamber has submitted recommendations on retooling the Government’s “Be the Smart Regulator” Programme with a view to making it easier to run a business in Hong Kong.

We have been calling on the Government to draw reference from the U.K.’s approach in applying regulatory impact assessments (RIAs) to improve policy making and reduce the costs to business. We believe that adopting an evidence-based, cost-benefit approach to the evaluation of new and existing legislation would provide relief to Hong Kong companies while also improving our appeal as a place to do business. 

The following are examples of existing legislation that would benefit from review.

I    A review and update of the IRO would help ensure that its provisions are consistent with current conditions. The benefits of a comprehensive review would more than offset the costs by creating a taxation framework that is predictable, understandable and stable.

II     Legislation should be revisited to remove regulatory controls that impede the development of electronic commerce in Hong Kong, often out of such well-meaning intentions as consumer protection. We suggest drawing on the experience in other economies such as the U.K., Canada and the U.S. to strike an appropriate balance between enabling e-commerce and protecting consumers.     

III    Building codes could benefit from a revamp. Under the current regime, building plans are required to be vetted by three different departments. Likewise, the town planning process would benefit from refinements including streamlining the existing town planning model.

IV    Anachronistic regulations on fire safety are exemplified by the disconnect between fallow industrial buildings and pent-up market demand. The lack of flexibility in use has driven legitimate businesses, such as gyms and art galleries, to operate underground. 

We recognise that the task of reviewing existing legislation is difficult and complex. This makes the process of ‘cleaning house’ much more compelling, which arguably should commence as soon as practicable. We suggest that the Government set up a working party to oversee the work of evaluating Hong Kong laws that includes members from the private sector. The Chamber is keen to contribute and shall be pleased to participate. 

Fiscal Initiatives and Administrative Enhancements

  • Reduce profits and salaries taxes by 1% for a finite duration 

The Government can more than afford to ‘share its wealth’ with taxpayers and we suggest that this be done through cutting taxes for both individuals and corporates.  

We understand the impact this would have on government income, so we suggest these tax cuts have a limited shelf-life of three years. 

  • Allow carry back of tax losses and group loss relief

This is useful to businesses in promoting cash flow and particularly critical to weathering choppy economic conditions. It is instructive to note that the Financial Services Development Council (FSDC) has proposed a policy framework to allow corporate groups to transfer tax losses among wholly owned companies operating in Hong Kong. 

Based on the experience of jurisdictions such as Australia, Singapore and the U.K., anti-avoidance, revenue loss and legal complexities are not insurmountable issues. To avoid possible abuse, reference could be made to the aforementioned jurisdictions and companies can carry back losses for two years only.

  • Amend Section 39E of the IRO to grant tax depreciation allowance for plant and machinery (P&M) used under import processing arrangements outside Hong Kong

Denial of the depreciation allowance contradicts the basic principle of allowing taxpayers to deduct costs incurred in the production of profits. The language of the law has had the unintended effect of disallowing depreciation allowance even when the P&M were used to generate profits taxable in Hong Kong, solely because these were used by others outside Hong Kong.

Hong Kong suffers from a disadvantage in this regard compared to Singapore, where an Integrated Investment Allowance for capital spending overseas for outsourced manufacturing arrangements was introduced in 2012.

  • Incentivise the establishment of regional headquarters

Hong Kong is already a premier location for regional headquarters (RHQs) in Asia. However, there is growing competition from other jurisdictions, such as Singapore and Shanghai, which have introduced tax concessions to attract RHQs. 

We cannot afford to be complacent and would therefore suggest tax incentives modelled on those introduced recently for Corporate Treasury Centres (CTC). Under the CTC regime, qualifying profits derived by the CTC can enjoy a 50% reduction on the prevailing corporate tax rate, equivalent to 8.25% at the current tax rate of 16.5%.  A similar incentive should be granted to regional offices/headquarters in Hong Kong in respect of management and consultancy income derived from associated entities overseas.

  • Zero Withholding Tax for Hong Kong companies investing overseas

Hong Kong does not impose withholding tax (WHT) on dividends and interest payments to non-resident parties. Where possible, Hong Kong should strive for reciprocity treatment, namely, 0% dividend WHT on payments from CDTA parties to Hong Kong investors.

As a priority, the Mainland China-Hong Kong CDTA should be reviewed with the objective of reducing the dividend WHT rate to 0%. Such a precedent already exists in the CDTA between Mainland China and Georgia.

This proposal benefits both Mainland and Hong Kong businesses in the following ways. It:

I    Encourages investment into Mainland China through Hong Kong;

II    Enhances Hong Kong’s role as a super-connector between Mainland China and overseas economies; and

III    Reinforces Hong Kong as a base for establishing regional/international headquarters.

Hong Kong already enjoys 0% WHT on dividends with Ireland, Mexico, Spain and Switzerland through CDTAs. It follows that Hong Kong should also strive for 0% dividend WHT for investments with its top trading partners.

A 0% WHT on dividends is also compelling in the context of the Greater Bay Area initiative. As the borders between Hong Kong and Southern China become increasingly blurred, artificial impediments in the form of discrepancies in taxation policies should also be reviewed.

  • Enhance clarity in source-based tax system

Legislative amendment on determining the source of different types of income is urgently needed. Hong Kong’s source-based tax system has long been a clear and clean competitive offering, but court decisions have obfuscated the rules for determining the source of profits. If these uncertainties are not removed promptly it may harm our reputation as having a certain, simple and fair tax system.

  • Review tax reassessment period

Under the current IRO, the IRD can re-open or issue additional tax assessments within six years after the end of the related year of assessment. For tax loss cases, however, the six-year time-bar rule does not apply. The Companies Ordinance and the IRD require a company to keep records for a period of seven years. However, in cases where the company is in a tax loss position, this effectively means that the taxpayer has to retain records indefinitely.  

To enhance tax certainty, the Government should consider reducing the time-bar period to three years. For tax loss claims, the IRD should endeavour to issue the Statement of Loss upon submission of the tax return and the three-year time bar rule should be consistently applied to Statement of Loss cases.

Conclusion
We appreciate that the recommendations put forward above, if adopted, will take time and resources to complete. In the interest of creating a lasting impact, we suggest priority be given to the proposals of (1) establishing a working party to formulate an appropriate RIA framework for reviewing new and existing legislation, and (2) reducing profits and salaries taxes by 1% for a limited period of three years. 

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