Tax reform in Hong Kong can drive new engines of economic growth

Ayesha Lau says that as global tax rates fall, Hong Kong’s traditional advantages are eroding, and tax policies should now be used to encourage sectors where the economy has room to expand

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Chief Executive Carrie Lam attends the Canadian Chamber Luncheon on Monday. The two tax measures Lam announced in her policy address signal a competitive new direction for Hong Kong’s tax system: using tax policies to strategically support economic growth. Photo: Edward Wong

Published: 11:49am, 24 Oct 2017Updated: 7:14pm, 24 Oct 2017

In her manifesto for the election, Chief Executive Carrie Lam Cheng Yuet-ngor proposed a competitive new direction for tax policies to strategically support economic growth. Her maiden policy address echoed this new direction, announcing two important tax measures: a two-tiered profits tax and a super-deduction for research and development expenditures.

It is indeed timely to examine Hong Kong’s tax policy. Traditionally, Hong Kong has adhered to two principles for its tax system – a low tax rate and simplicity. In the past decade or so, most countries have reduced tax rates. The average corporate tax rate in Asia has fallen from 29 per cent in 2006 to 21 in 2017. The UK corporate tax rate has fallen from 30 per cent to 19. Even the US, under President Donald Trump, has announced its plan to reduce the federal corporate tax rate to 20 per cent. Hong Kong’s standard 16.5 per cent rate is still on the low side but its competitive advantage is no longer as significant.

US President Donald Trump has made a sharp cut in the federal corporate tax rate central to his agenda. Photo: AP

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Simplicity is important for a good tax system if, in addition to having few deductions and exemptions, it means clarity in tax laws and certainty in practical application, plus low compliance and administrative costs. But with transactions becoming more complex and sophisticated, a seemingly simple tax system may result in uncertainty and uncompetitiveness.

Numerous studies have consistently shown tax as a key factor in attracting business, funds and talent to a jurisdiction. Many countries around the world make use of the tax system to support growth of specific new industries. The tax system is a powerful tool to drive economic growth. Hong Kong’s new directions for taxation should include a more proactive use of its tax system to support growth, rather than merely using the tax system to collect government revenue.

A view of the Central, the political, administrative and financial hub of Hong Kong. Hong Kong’s traditional key industries, including financial services, have seen a slight downturn recently, leading some to believe it is time to think of new growth engines for the Hong Kong SAR. Photo: AP

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It is a virtue for an individual or households to keep expenditures within income constraints. But a government can do the opposite by controlling its income within the needs of expenditure; a government should only collect taxes and other revenue up to the level required to fund needed public expenditures, because its objective is to maximise people’s welfare, using fiscal and taxation policies as tools, and not to maximise revenue or fiscal surplus.