HK Chief Regrets Inability To Cut Corporate Tax

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

06 January 2012

Hong Kong’s Chief Executive Donald Tsang has expressed his regret that, due to the current risks arising out of the global economic situation, he will be unable to fulfill his pledge, made in 2007, to reduce the rate of profits tax to 15% before his term of office ends in June this year.

The rate has remained at 16.5% since it was reduced in 2008/09 from 17.5%. In a radio interview, Tsang has confirmed that it will be impossible to reach the 15% level in the short-term, given the continuing threat of a worldwide recession.

Pressure has been building on the government’s policy to keep the profits tax rate steady after Singapore reduced its corporate income tax rate to 17% in 2010/11, only 0.5% higher than Hong Kong’s rate. There has yet to be any indication from Singapore whether there are any plans to announce a further rate reduction in the budget for this year, due in February.

Earlier last year, when it was asked what it was doing to enhance the international competitiveness of Hong Kong’s businesses, the government had had to defend its decision not to reduce the present profits tax rate, especially given that the revised estimate of the revenue from profits tax for 2010-2011 was HKD93.5bn (USD12bn), or HKD15bn (over 19%) more than the original estimate.

It has been pointed out, however, that, while profits tax is the largest source of government revenue, it is also highly sensitive to economic fluctuations, and the government has to assess its overall financial position to ensure that there is sufficient revenue in the long-run to cope with increasing public expenditure.

A rough estimate was given that, if the profits tax rate had been reduced to 15% for 2011/12, it would have cost the government around HKD7.5bn in the year.

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