Hong Kong Government Publishes Final Tax Reform Report

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

13 June 2007

The Hong Kong government has published its final report with regard to the public consultation on tax reform, which has recommended that several options be explored to widen the territory's narrow tax base.

Financial Secretary Henry Tang told reporters on Tuesday that a total of 2,400 written submissions had been received during the nine-month consultation.

The consultation was launched as a result of the government's decision to scrap plans for a goods and services tax.

"Although the public cannot accept at this point in time the Government's introduction of a goods and services tax, the public has generally obtained a better understanding of the problems of our narrow tax base during the consultation process and agreed that the Government should broaden the tax base to stabilise revenue to enhance fiscal health," Mr Tang stated.

Options for broadening the tax base included introducing a green tax, a land and sea departure tax, a tax on luxury goods, and a progressive profits tax, as well as reducing personal allowances under salaries tax.

There are suggestions that the Government should not rely on a single option, but should deploy a basket of options to broaden the tax base and stabilise revenue sources. However, Mr Tang pointed out the public does not have any clear inclinations or mainstream views on which option or options the Government should adopt.

"Although our economy has recovered and the Government's financial position has improved, Hong Kong's dependency ratio would be rising rapidly in the face of our ageing population. Moreover, globalisation would bring challenges to our education and manpower training," he observed.

Noting that it is necessary for the next Government to address this fundamental issue at a suitable time in future, Mr Tang revealed that the final report has made four suggestions, namely:

• Having raised public awareness on the deficiencies of a narrow tax base, the Government should continue to study options for broadening the tax base and address this fundamental issue at a suitable time in the future;
• In studying the options for broadening the tax base, the Government should take into full account the views collected in this consultation exercise and consult the public further on those options which are more practical;
• As the problem of ageing population is getting more serious and this would bring additional pressure to bear on public finances, the Government should consult the public on healthcare-financing proposals as soon as possible; and
• To enhance Hong Kong's competitiveness, the Government should continue to advance education and manpower training, and explore sustainable financial arrangements to respond to the long-term needs.

In considering the various options for broadening the tax base, the Government has been directed to take into account the following principles:

• The option must be effective in broadening the tax base and providing stable and considerable revenue for the Government to meet its future needs;
• The option must be fair and in line with the "capacity to pay" principle, and should not widen the wealth gap; and
• The option should be in line with Hong Kong's simple and low-tax system to attract capital and talent, and maintain the territory's competitiveness.

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