Hong Kong falls behind on tax reform: analysts

HONG KONG, February 15, 2012 (AFP) - Hong Kong's competitiveness as a regional centre for business and trade is under threat from the very thing often credited with its success -- its tax system, analysts say.

The former British colony is holding elections in March to choose a new chief executive, and experts are already urging the next government to undertake a comprehensive tax review for the first time in almost 40 years.

The semi-autonomous Chinese city doesn't need to raise more money -- fiscal reserves stood at HK$654.9 billion ($84.5 billion) on December 31, or about 2.5 years of government expenditure.

What it needs, analysts say, is a broader tax base to give it greater flexibility to spend its reserves while reducing its dependence on volatile income taxes and stamp duties.

A survey in January of 200 finance, accounting and business professionals by accounting body CPA Australia found overwhelming support for sweeping change to the city's tax regime.

More than 80 percent agreed that a broad tax review should be a priority of the incoming administration, citing the need to pay for an ageing population and maintain Hong Kong's edge as the best place to do business in Asia.

"While our business community has adapted to the monumental shift in the global economy, our tax system has remained largely the same for the last 35 years," Loretta Shuen of CPA Australia's Greater China division said.

"Hong Kong is widely recognised as having the freest economy in the world but to maintain this position our tax system needs to be looked at."

The Hong Kong Institute of Certified Public Accountants has been issuing similar appeals since at least 1999 when it laid out the "case for a fundamental review" of Hong Kong's revenue stream amid the Asian financial crisis, a crash which led to five years of deficits.

"While Hong Kong's relatively simple, low-rate tax system remains an advantage, from a tax perspective our competitiveness continues to be eroded as other jurisdictions seek to attract more business through changes in their own tax regimes," the institute said last month in a pre-budget report.

Taxation is just one of several areas where Hong Kong is feeling insecure about its long-term attractiveness as a business centre. The list includes a lack of affordable housing, poor air quality and a shortage of school places.

Corporate income tax rates in Singapore -- Hong Kong's main rival as Asia's premier business hub -- have fallen to within a whisker of Hong Kong's over the past 15 years.

The introduction of a goods and services tax (GST) in 1994 allowed Singapore to cut income taxes and offer incentives to newcomers to start or headquarter businesses there, KPMG China Tax Partner Jennifer Wong said.

Singapore's corporate income tax has fallen from 30 percent on the day before the GST was introduced, to 17 percent currently. Many analysts say that's a little too close to Hong Kong's 16.5 percent for comfort.

Meanwhile, as the GST has climbed from three to seven percent, Singapore's revenue base has stabilised and its flexibility to offer exemptions and other investment incentives has increased.

"A GST of seven percent helped the government reduce the corporate income tax by 13 percent," Wong, who supports the introduction of a GST in Hong Kong, told AFP.

"The reason to introduce a GST is not to increase revenue but to widen and stabilise the tax base," she said, adding that visitors could receive GST refunds, as they do in Singapore, to protect Hong Kong's tourism industry.

A GST would also mean that "everyone has to pay", Wong added. And that's the hitch. Less than 40 percent of Hong Kong's roughly 3.4 million workers currently pay tax, according to KPMG figures.

As the government heard loud and clear when it last consulted the public about a GST in 2006, very few people want to pay.

The idea has been on ice ever since, and there appears to be little political will among the leading candidates for chief executive to do more than tinker around the edges of the current tax system.

Unveiling his final budget earlier this month, Finance Secretary John Tsang disappointed those who might have been hoping for a last-minute epiphany from the outgoing administration.

"Some people have suggested, among other things, that this year's budget is not visionary or daring enough, or that it lacks new and exciting initiatives," Tsang said Sunday.

"As far as that is concerned, all I can really say is: Guilty as charged."

The 2012-2013 budget promised HK$80 billion in stimulus spending and one-off tax breaks, but ignored pressure for long-sighted tax reform.

"Hong Kong people will benefit from the string of measures like tax reductions ... But in the long run, there are no promises," Hong Kong Taxation Institute Vice-President Godwin Ng said.

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