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Kenneth Wong writes that to prepare for imminent economic challenges and opportunities Hong Kong should conduct its first major tax review for 40 years

Financial Secretary John Tsang Chun-wah is going to announce the government's fiscal budget for 2016-17 on Wednesday. The Association of Chartered Certified Accountants Hong Kong (ACCA) estimates that the government will record a surplus of approximately HK$70 billion.

Given there has been a significant surplus consistently over the past few years, leading to the accumulation of fiscal reserves close to HK$900 billion, the government should have a long-term strategy on how to reinvest the resources back into Hong Kong society to build the necessary infrastructure for its sustainable economic growth. The following tax-related recommendations, supported by an ACCA member survey, were submitted to the government for the purpose of ensuring the continuous prosperity and stability of Hong Kong.

To strengthen Hong Kong's role as the "super-connector" between the Chinese mainland and the rest of Asia under the Belt and Road Initiative, ACCA urges the government to consider implementing measures to enable Hong Kong to act as a regional hub. These include offering concessionary tax rates (e.g. a half rate) for the set-up of corporate treasury centers and regional headquarters. Given Hong Kong's proximity and close connection to the mainland and the Asian countries along the 21st-century Maritime Silk Road, such tax incentives would lure more mainland and foreign investors to set up their regional headquarters and corporate treasury centers in Hong Kong in serving their investments in Asia.

Hong Kong's economy has long been supported by small and medium-sized enterprises (SMEs). To help SMEs thrive amid economic uncertainty, ACCA suggests a concessionary profits tax rate be offered to qualifying SMEs within a limited time frame to alleviate their financial pressures.

To encourage businesses to invest in significant research and development (R&D) activities, ACCA suggests super tax deduction or cash rebate for qualifying R&D expenditure incurred in this sector. This helps promote the development of high-tech products with significant intellectual property content. The Innovation and Technology Bureau can play a role in identifying and facilitating companies qualified to enjoy such incentives. This will enable better coordination of investment in innovation R&D.

Hong Kong boasts its simple-low-tax system as one of the factors that make it a successful leading financial and commercial center. However, the last review of Hong Kong's tax policy was done almost 40 years ago. Yet with all the recent changes in international tax regulations and global economic development, Hong Kong needs to conduct a comprehensive review of its tax system to ensure it remains competitive and meets the needs of society. This should include, but is not limited to:

1) Finalizing the tax losses cases within the statutory limitation period; 2) Allowing the tax loss of a business to be carried back against the preceding year's assessable profits; 3) Allowing group loss relief, by which the tax losses of one company could be used to offset the taxable profits of another company within the same group; 4) Extending depreciation allowances from Hong Kong operators to all foreign and mainland airlines to promote aerospace financial services in Hong Kong.

Regarding the "sweeteners" handing out by the government every year, which are the focus of many in the budget announcement, the government should consider formalizing these measures and incorporating them into the tax system by revising the tax rates under both profits tax and salaries tax, instead of implementing these concessionary measures for a prolonged period of time. This would not only allow taxpayers to better plan for their tax liabilities but also demonstrate the government's commitment in supporting the community.

Government figures show that salaries tax contributed over 11.3 percent of the government's estimated revenue in 2015-16. In view of rising living costs, ACCA suggests the government consider providing tax measures to relieve taxpayers' burden. These should include:

1) Adjusting personal allowances to HK$140,000; 2) Widening the income bands to HK$50,000; 3) Relaxing the "residence" requirement for claims of dependent parent allowance and dependent grandparent allowance to a maximum of 305 days absence per year; 4) Doubling the married person's allowance for newly married couples in the first year of marriage to provide some tax relief to the younger generations; 5) Allowing tax deduction for private medical insurance premiums, capped at HK$15,000 per person, to encourage the public to prepare for their own medical care expenses; 6) Allowing deduction of the actual wages for employing one domestic helper, capped at the minimum wage of HK$4,210 per month for each married couple.

With the slowing down of economic growth on the mainland, the intensifying of political turmoil in Europe and the rising interest rates in the US, Hong Kong is facing a difficult international economic climate. ACCA has been long advocating the importance for the government to adopt measures to strengthen its long-term position as an international financial center, ensure the continuous provision of a business friendly environment, relieve the burden on people paying salaries tax and extend support to the community in order to help businesses and Hong Kong citizens withstand the challenges ahead.

(HK Edition 02/19/2016 page11)