GST May Bring About Cut In Hong Kong's Profit Tax

by Mary Swire, Tax-News.com, Hong Kong

18 July 2006

The Hong Kong government has stated that it may be prepared to slash the territory's rate of profit tax as part of plans to introduce a goods and services tax.

In a paper issued to the Legislative Council on Saturday, the government suggested that a 5% Goods and Services tax would raise sufficient revenue to allow a cut in profits tax from the current level of 17.5% down to 12.5%.

Although the SAR already has one of the lowest corporate tax rates in the world, such a cut in profits tax would make Hong Kong very attractive to companies compared with its regional rivals such as Singapore, where corporate tax is 20%, and South Korea, where corporate tax is 27.5%.

One of the principal aims of the GST would be to widen Hong Kong's notoriously narrow tax base rather than to raise additional sums in tax revenues. The Hong Kong government presently relies on volatile sources of income such as land sales and investments for much of its revenues. The government estimates that a 5% GST would raise about HK30 billion (US$3.86 billion) in revenues.

The government also indicated that the GST could allow it to reduce salaries tax to 11%. Currently, Hong Kong employs a graduated scale of salaries tax, but the system is designed so that nobody pays more than 15% of their assessable income.

The proposals presented to the LegCo are to form the basis of a nine month public consultation on the introduction of the GST.

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