Hong Kong Looks At Narrow Tax Base

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

29 November 2011

In his written response to a question in the Legislative Council, the Secretary for Financial Services and the Treasury, Professor K C Chan, confirmed that the government is building reserves to cater for the longer term needs that could arise from Hong Kong’s ageing population, taking into acount the SAR's narrow tax base.

He was asked whether, given that the government relies on tax revenue to meet its welfare expenditure, and that Hong Kong will be at the peak of population ageing starting from 2030, whether it has made any preparation for meeting various welfare expenses, such as pensions, social security and medical services, while maintaining the principle of a low tax regime and in the face of a continuous income disparity between the rich and the poor.

Due to the narrow tax base of Hong Kong, coupled with the fact that the main sources of government revenue (for example, profits tax and salaries tax) are sensitive to economic fluctuations, Chan emphasized that the government has been adopting the strategy of containing government expenditure while using its fiscal reserves as a buffer for deficits in individual years.

However, to prepare for the future, he said that the government is aware that it has to ensure that Hong Kong has adequate amount of reserves to meet future challenges, including the long-term financial pressure brought about by an ageing population.

He recorded that, to address the problem of narrow tax base, the government had issued a Consultation Document on Tax Reform in July 2006. “Through the consultation,” he wrote, “members of the public have generally gained a better understanding of the problem of our narrow tax base and they agree that the problem should be addressed. However, there is no clear inclination or mainstream view on which options should be adopted to broaden our tax base.” He added that the government would continue to study options for broadening the tax base.

Chan concluded that the ageing population is a long-term problem that calls for sustained efforts of the community and the government in all areas. In particular, the government and the Mandatory Provident Fund Schemes Authority “will continue to explore and pursue appropriate ways to improve the Mandatory Provident Fund system that helps the working population accumulate retirement savings, including increasing competition with a view to driving down administration fees and reviewing the withdrawal arrangements.”

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