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Hong Kong Considers How To Maintain Low-Tax Regime

by Mary Swire,, Hong Kong

31 March 2014

Following a question in the Legislative Council on the recent report of the Working Group on Long-Term Fiscal Planning, Hong Kong's Secretary for Financial Services and the Treasury, Professor K C Chan, reiterated that fiscal prudence will remain the Government's guiding principle in managing public finances, as will the maintenance of the low-tax regime.

The questioner noted that the recent report of the Working Group on Long-Term Fiscal Planning – set up in June 2013 to look at the state of Hong Kong's public finances – suggested that a future structural fiscal gap will require the Government to find additional tax revenue.

Firstly, Chan confirmed that the Government would adhere to keeping expenditure within the limits of revenues, ensure a fiscal balance by avoiding deficits, and ensure that the budget keeps pace with the growth of Hong Kong's economy.

While government revenue has exceeded 20 percent of gross domestic product (GDP) in recent years, he pointed out that the excess was largely attributable to the increase in land revenue, which amounted to some 3 to 4 percent of GDP, as compared with a previous average of about 2 percent. Land revenue is not, however, recurrent in nature, and government revenue was on average 18.6 percent of nominal GDP between 1997-98 and 2012-13, with the trough at 13.3 percent and the peak at 22.6 percent. Chan said these fluctuations are on account of the low tax regime in Hong Kong.

Chan confirmed that that the Government concurred with the Working Group's findings on broadening the revenue base more towards indirect taxes, but noted that there is little room for major tax hikes (irrespective of whether these hit direct tax or indirect tax), having regard to the competitiveness of Hong Kong and the impact on the community. While the Government will not rule out any means to increase tax revenue, it also understands that any tax increase proposals will be controversial and may entail other policy considerations, Chan said.

Chan disclosed that government service fee levels are being re-examined in accordance with the "user pays" principle, where service users pay for the full costs of the services without requiring taxpayers to bear a burden. At present, there are more than 4,000 fees and charges in Hong Kong set according to that principle.

However, he also stressed that, while all policy bureaux and departments are reviewing their respective fees and charges, they will also take into account other factors, including the specific circumstances of the services provided, public affordability, and acceptability.

TAGS: tax | business | fiscal policy | financial services | gross domestic product (GDP) | international financial centres (IFC) | budget | fees | offshore | Hong Kong | revenue statistics | services

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