Enhancing Tax Administration in Hong Kong

Speech of the Hon KP Chan at the Legislative Council on 7 July 2010 on Enhancing Tax Administration in Hong Kong

MR PRESIDENT: The theme of the Hon Paul Chan Mo-po’s Motion today on “enhancing tax administration in Hong Kong” is betterment of tax policy. However, its coverage and proposals are more than measures in improving the market share of Hong Kong as regional headquarters of multinational enterprises in Asia and even the world and in turn enhancing competitiveness of Hong Kong as international financial centre. The Motion also proposes to resolve socio-economic inequalities including reduction of the rich/poor gap through tax policy.

This Motion is significant in depth and breath. I fully subscribe to the Hon Chan’s views and lend my support. It also demonstrates his commitment as Member representing a Functional Constituency to put forward quality and constructive proposals to the Legislature and society.

Mr President, I would like to focus my remarks on an important proposal of the Motion, ie strengthening the competitiveness of Hong Kong as a regional trade and commerce centre through tax incentives.

Actually, our neighbouring countries are challenging Hong Kong’s competitiveness. I notice a trend that is unfavourable to our long term development in recent years. Many multinational enterprises are setting up regional headquarters in places like Singapore, Beijing and Shanghai rather than Hong Kong. Many others are removing out of Hong Kong as well.

Undoubtedly, one of the cornerstones of success of Hong Kong is simple and low taxation. However, simplicity and low are relative in practice. When other countries and cities are following suit and they are even more affirmative and aggressive (like reducing tax rates and offering incentives to attract foreigner to set up regional headquarters), our competitive edges would be eroded.

I share the view of the Hon Paul Chan that apparently Hong Kong is falling behind in the global trend of profits tax. Comparing with neighbouring countries and cities, Hong Kong is not providing sufficiently attractive tax incentives and other advantages in doing business that are appealing to enterprises all over the world to choose us as regional headquarters. Hong Kong is even not appealing enough to retain enterprises already having headquarters here.

In fact, official figures of Census and Statistics Department show that regional headquarters in Hong Kong reduced in number from 1,298 in 2008 to 1,252 in 2009.

In the wake of economic globalization, the competition for regional headquarters is becoming really intense. Many countries are actively developing “economics of headquarters” because long term economic benefits arising from tax revenue, production multipliers, consumption expenditure, labour and employment and social capital would far exceed tax incentives offered.

In March this year, the Hon Mrs Sophia Leung proposed a meaningful Motion on “increasing dynamics for upward social mobility”. I also proposed a minor Amendment asking the Government to provide tax incentives and other attractions in doing business as a means of appealing to enterprises around the world to choose Hong Kong as regional headquarters. In turn, it would create more job opportunities and offer more diversified occupations as a means of increasing upward mobility and international perspective of young people.

The message of this amendment was simply asking the Government to appeal to foreign enterprises to choose Hong Kong as regional headquarters through tax incentives and other attractions in doing business. It was a very clear and positive message. From wording of Amendment and speech at debate, I did not ask for specific tax reduction or incentives. I merely ask the Government to follow the practices of our neighbours and make Hong Kong more appealing thorough tax and business incentives. I was disappointed that the Amendment was defeated by abstention of some pan-democrats.

In my view, the outcome is sending a very poor message and impression to the international community and foreign enterprises. It is also damaging the competitiveness of Hong Kong as an international financial centre.

My learned friends of the pan-democrats told me afterwards that they abstained simply because taxation in Hong Kong was already very low. I was really upset. Some fellow Members do not seem to realize how important “economics of headquarters” are to Hong Kong. They do not understand that Hong Kong is competing in a dynamic setting. If Hong Kong were complacent, we would be loosing off in competitiveness. In the contrary, if the Government made good use of tax incentives and foreign enterprises were attracted to set up headquarters in the territory, there would be substantial increase in jobs and consumption to the benefit Hong Kong, wouldn’t it?

Government revenue in Hong Kong relies much on land sales and investment returns. Tax base and net are relatively narrow. Yet, any tax reform would have chain effects. The proposed Goods and Services Tax, for instance, would have far-reaching implications beyond the ambit of the responsible policy bureau. Therefore, the Government should consider setting up a special unit to handle tax policy.

As we know, this Council is deliberating the issue of minimum wage. Questions of helping the poor and resolving poverty, in particular the employed poor are actively debated both inside and outside the Legislature as well. I support minimum wage but often wonder why the Government do not propose or look into relative tax policy at the same time to help make such debates in the community more substantial and complete.

Take helping the poor as a case in point. Should the Government take the more daring lead in debates of relevant tax policy inside and outside the Legislature and make them more pragmatic and meaningful in society? So are issues of the employed poor and minimum wage.

For instance, the US introduced Earning Income Tax Credit (EITC) or Earned Income Credit (EIT) back in 1975 to encourage more low income people to find jobs. This is considered as the most important policy measure of helping the poor in that country. Many economists have studied socio-economic advantages of EITC in depth including Milton Friedman that advocates “negative income tax”. Local economists like Joseph Lin, former Chief Editor of Hong Kong Economic Journal (Shun Pao) has also written on the subject. Classical economists are supportive of the policy but our Government hardly leads any discussion.

Mr President, tax policy is definitely an effective measure in resolving socio-economic and livelihood issues. However, whether this measure would produce the desirable results depends on whether we are applying it properly. As explained earlier, any tax reform would have far-reaching ramifications. I ask the Government to consider the proposal of this Motion and establish a special unit to handle tax policy in Hong Kong. Apart from maintaining and promoting international competitiveness, it would also help resolve local poverty problems.

Mr President, with theses remarks I support the Motion and Amendments.

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