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Hong Kong Could Adopt VAT To Fund Broader Tax Cuts: Report

by Mary Swire, Hong Kong

17 November 2016

CPA Australia has released a survey showing that Hong Kong's simple and low-rate tax code continues to underpin the territory's global competitiveness, but that it faces stronger international tax competition.

Alex Malley, Chief Executive of CPA Australia, said: "It is important for an economy to be proactive in relation to the competitiveness of its tax system. Since 2000 we have seen significant reductions in company tax rates in many economies including the UK, Turkey, Ireland, and Taiwan. Hong Kong is currently competitive but it needs to build on its strong position."

"The Hong Kong Government showed in this year's Budget that it has a real commitment to generating long-term growth through strategic investments in innovation and research and development," Malley added. "We hope to see this commitment include consideration of relevant taxation reforms."

Paul Ho, Chair of CPA Australia's Taxation Committee – Greater China, pointed out that, "to address Hong Kong's long-term economic and social challenges, from an ageing population to a widening income gap, it is important that a comprehensive review of the tax system is part of the Government's agenda in the short term."

He noted that "Hong Kong has a relatively narrow and volatile tax base which will eventually place pressure on government finances. Broadening Hong Kong's tax base – perhaps through the consideration of a [value added tax] with suitable compensation mechanisms – should improve the Government's long-term financial stability. It could provide a more stable source of revenue that may in time be used to lower other taxes which would contribute to Hong Kong's competitiveness."

With the number of regional headquarters (RHQs) in Hong Kong falling behind Singapore (Hong Kong has almost 1,400 and Singapore has over 3,500), respondents to the survey were supportive of the Government undertaking further action to encourage more RHQs to establish or enhance their presence in Hong Kong.

Specifically, respondents were most likely to favor the introduction of new tax incentives such as a tax holiday or a reduced profits tax rate for companies that establish such RHQs in Hong Kong. Only nine percent did not believe that there is a need for further incentives.

The survey also found that 80 percent of respondents would like the Hong Kong Government to introduce measures to encourage the further development of the Hong Kong's Fintech sector with preferential tax policies for both start-ups and established financial institutions.

In addition, 58 percent supported implementing special tax incentives to encourage Hong Kong businesses to increase their collaboration with the rest of the Pearl River Delta region; and 29 percent of respondents supported the introduction of progressive profits tax rates in the next Budget. Such a policy would result in small- and medium-sized companies being taxed at a lower profits tax rate to larger companies.

TAGS: tax | business | value added tax (VAT) | tax incentives | banking | corporation tax | corporate headquarters | tax rates | Hong Kong | tax breaks | tax reform | services | research and development | Tax

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