SMEs stand to profit from proposed new tax regime in Hong Kong

Industry professionals see more upside for business than a loss in public finances in Chief Executive Carrie Lam’s proposal to introduce a two-tier tax profits regime to reduce companies’ burden.

Businesses with an annual profit of less than HK$2 million would see their tax cut from 16.5 per cent to 10 per cent in terms of the proposal – a move that is expected to relieve the burden on small- and medium-sized enterprises (SMEs). Industry leaders say this would be likely to substantially benefit SMEs with minimal impact on public finances.

William Chan, tax partner at Grant Thornton Hong Kong, says there is “always an argument that a reduction in tax may lead to an increase in investment and economic activities which would in turn raise tax revenue. The business community would welcome a reduction in tax as most businesses are SMEs, so this would benefit them the most.”

Caesar Wong, managing director of China Business Services at RSM Hong Kong, says: “Although Hong Kong is a remarkably successful economy, a surprisingly small number of companies contribute to public tax.”

According to the “public consultation on the 2017/18 budget”, only about 9 per cent (100,900) of the 1,149,000 registered corporations in 2014/15 paid tax. “More than one million companies did not need to pay profits tax,” Wong says. “About 86 per cent of profits tax was contributed by the top 5 per cent taxpaying corporations – about 5,000 companies. More than 67 per cent of the profits tax was paid by 1,000 companies.”

Chan agrees. “According to the Research Office of the Legislative Council Secretariat, the profits tax collected by the government in the 2016/17 financial year was HK$139.2 billion, or 24.3 per cent of the total revenue, “Chan says. “The profits tax is forecast to be HK$139.0 billion for the 2017/18 financial year or 27.4 per cent of the total revenue. A reduction in the profits tax rate would have a major impact on public finances.