With the government due to announce its 2010/11 budget next month, the Hong Kong Institute
of Certified Public Accountants (HKICPA) has issued its budget proposals, recommending
reduced taxes for companies, improved benefits for individuals and increased
certainty in the tax system, plus the adoption of other measures to support
the development of Hong Kong’s financial and professional services.
In particular, based on Hong Kong’s improving economy, HKICPA suggests
that corporate tax rates be reduced by 0.5% to 16% for 2010/11, and to 15% over
the longer term. The standard rate, it says, should remain at 15%.
Looking ahead, and with an eye toward Hong Kong’s future growth,
HKICPA is calling for a comparative study of effective tax rates within the
region, with the aim of assessing whether it is appropriate for Hong Kong to
reduce the corporate profits tax to below 15%. It notes that Hong Kong’s
regional competitors, such as Singapore, have drastically dropped their tax
rates over the past decade.
“While we still have a low-tax regime, the gap between Hong Kong and
other markets has been narrowing significantly in recent years,” said
Ayesha Macpherson, HKICPA’s taxation committee chair. “We must not
become complacent or take it for granted that the tax system here gives us unrivalled
advantages. We should upgrade and improve it where necessary.”
HKICPA also recommends more support for families and the middle-income
group, with 20% increases in child allowances and allowances for dependent parents,
grandparents and disabled family members. It also proposes a new deduction for
private medical insurance to encourage more people to consider the option of
private medicine to help ease the burden on public health services.
With a view to attracting businesses, HKICPA continues to press for a clearer
tax system and streamlined administration. One unclear but fundamental part
of Hong Kong’s tax code, it says, is whether particular profits are to
be treated as onshore and so taxable, or offshore and not taxable. This is a
particularly sore point given the volume of international transactions carried
out in the territory, according to Macpherson. Clear and appropriate
criteria should be introduced in the Inland Revenue rules for determining the
source of profits.
Transfer pricing is another important area of uncertainty. HKICPA considers
that comprehensive transfer pricing rules need to be introduced, including legislation
and arrangements for advance pricing agreements. To keep up with its peers,
Hong Kong also needs to put in place a group loss relief system.
For HKICPA, there is also doubt, in practice, in determining whether an increasingly
mobile and international workforce is employed in, and taxable in, Hong Kong
or employed offshore. The taxability of employees who travel frequently is an
issue for business decision-makers who choose regional headquarters for their
companies.
To address this problem more effectively, HKICPA recommends adopting an approach
similar to that adopted in many overseas markets – to base the “source”
of employment income on the place where services are actually rendered, subject
to the existing 60-day exemption rule.
It says that financial services and professional services, two of Hong Kong’s
cornerstone businesses, could benefit from tax measures to expand the market
and open new niches; for example, fund management, insurance and Islamic financing
are all sectors within the financial services industry that could be encouraged
with tax breaks.
HKICPA looks at a situation where, for professional and producer services,
many international companies look to set up regional offices and headquarters.
For these businesses, where much of the work is cross-border, concessionary
tax rates for management fees from overseas associates and tax exemptions for
loan interest from overseas associates should be considered.
To attract more investment in the form of intellectual property development
and licensing in Hong Kong, HKICPA proposes adopting a “place of use” test to determine
source of royalty income; a 100% deduction for intellectual property acquisition
costs; and a more favorable tax treatment for the disposal of
intellectual property rights.
Finally, HKICPA asks the government to expand Hong Kong’s network of
double taxation agreements to enable taxpayers to obtain, inter alia, more favorable
withholding tax rates. In the meantime, it should offer unilateral tax credits
for withholding tax on royalties where no double taxation agreements exist.
“As Hong Kong continues its gradual and steady recovery from the financial
crisis, we need to build on our economic strengths and improve our competitive
position for the future. As the Chinese economy continues to grow and mainland
enterprises look for overseas investments, Hong Kong should be ready for these
business opportunities,” Macpherson added. “A combination
of tax reductions and a clear tax system will help Hong Kong locally and internationally.”
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