Enhancing the Tax System to Keep Hong Kong Competitive

MR CHAN KIN-POR (in Cantonese): Deputy President, Hong Kong has benefited from the principle of a simple and low tax system for many years. This principle has successfully attracted investors from all over the world to
invest in Hong Kong since its economy took off and Hong Kong has even been reputed as the freest and most competitive economy in the world. Now, the principle of a simple and low tax system is still pursued as a major policy to help attract investors from all over the world to invest in Hong Kong. I believe nobody will doubt that Hong Kong’s simple and low tax system has been a main contributor to its success. The subject for debate today is enhancing the tax system to keep Hong Kong competitive. I would like to start with the economic policy of Hong Kong, to be followed by an analysis of the development of the tax system in Hong Kong. In the colonial era, Hong Kong pursued a positive non-intervention policy. The Government would not intervene in the workings of the market unless absolutely necessary. This policy rendered Hong Kong a free trading port which we took pride in. Guided by the philosophy of positive non-intervention and under the influence of the British traditional way of thinking about taxation that a stable income was more important than economic adjustments, Hong Kong developed a simple tax system with very low tax rates. Unlike other places around the world at that time, Hong Kong adopted a system that did not impose any trade barriers. It was a true free trading port. With other supporting measures in place, Hong Kong naturally attracted a lot of investors. However, since the reunification of Hong Kong, financial systems around the world have undergone rapid changes and the development of the Internet has accelerated globalization. These factors have rendered the passive fiscal policies unable to adapt to changes in the market. In this regard, the Chief Executive Mr Donald TSANG announced in 2006 that Hong Kong would no longer adopt the policy of positive non-intervention and it would adhere to the “Big market, small government” principle instead. Since Hong Kong has abandoned the policy of non-intervention, should appropriate changes be made to the tax system which was derived from this policy so as to respond to the changes in the market? Given that the world economy has experienced huge fluctuations in recent years, governments over the world have adopted more and more proactive financial and monetary policies to rescue their economy. As for Hong Kong, it does not have its own monetary policy because of the linked exchange rate. Besides, its tax system, which is integral to its fiscal policy, has remained rather passive for a long time and cannot help enhance Hong Kong’s competitiveness. Therefore, apart from distributing
money to the public by various means, there is in fact little that the Government can do to revive the economy in the wake of the financial crisis. From another perspective, Hong Kong’s simple tax system has gradually losing its attractiveness. The major competitors of Hong Kong such as Singapore have in recent years adjusted their profits tax rates downwards to levels close to that in Hong Kong. As such, Hong Kong cannot rely on a low tax system alone. Now is the time to consider whether we should learn from our competitors and offer more targeted tax concessions, hence enhancing the competitiveness of Hong Kong. In conclusion, Hong Kong remains the most important free port in the world, so there is a need to retain the simple and low tax system. However, we should respond to the changes of the times and incorporate in our tax system appropriate tax concessions to attract more foreign investors to come to Hong Kong. The motion moved by Mr Paul CHAN today is timely. It sets out proposals to enhance the tax system having regard to the present situation in Hong Kong. Some people may think that incorporating more tax concessions will bring about changes to our simple tax system. As long as we exercise caution and increase transparency, the tax system in Hong Kong is still simple as compared with other countries. In addition to the above theoretical analysis, I would like to convey the views of the insurance sector. As a member of the business community, the sector considers that maintaining low tax rates is very important to Hong Kong. Both Singapore and the Mainland have offered many tax concessions to the business sector, but Hong Kong does not compare favourably with them in this respect. If Hong Kong can offer more tax concessions, the insurance sector believes that more multinationals are willing to set up regional offices in Hong Kong. The insurance sector is also of the view that tax concessions for the insurance industry have not been increased for many years. There is a need to conduct a review and promote the development of the insurance industry having regard to the changes in the market in recent years. I would like to respond to the amendment proposed by Mr Albert HO. In his amendment, Mr HO proposes abolishing the standard rate of salaries tax and introducing a two-tier profits tax system whereby the profits tax rate for those companies with assessable profits of $10 million or above should be raised by 1.5%. As a member of the financial sector, I must point out that these tax increase proposals in disguise, though well-intentioned, will most likely bring undesirable results. They will be interpreted by the international community as the beginning of changing the simple and low tax system in Hong Kong. In the end, international investors will be scared away and the economic competitiveness of Hong Kong will be undermined. The low tax system is a cornerstone of Hong Kong’s success. Any change to the tax system will have significant impacts and hence must be contemplated thoroughly. When we talk about competitiveness, it is inevitable that we will compare Hong Kong with Singapore, which is our competitor, and Shanghai, which is our potential competitor. Undoubtedly, Shanghai is still some way behind Hong Kong. While Shanghai is becoming more and more competitive day by day, Hong Kong has come to a standstill. If nothing is done to improve the situation, it is just a matter of time for Hong Kong to be overtaken by Shanghai. As for Singapore, it has reduced profits tax time and again in recent years. If Hong Kong does the opposite, it is just telling Singapore that it is giving up its leading place. What Hong Kong should do now is to explore every means to expedite the pace of development and improve its competitiveness. If we decide to increase tax without thinking seriously, it is ourselves who will suffer. As for the enterprises and individuals to be affected by the tax increase, they will at most suffer from paying more tax. However, as for Hong Kong as a whole, it will suffer from jeopardizing its own future. Deputy President, I so submit.

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