More tax incentives needed to compete with our neighbours
In his budget speech, the financial secretary has highlighted a gloomy outlook of the Hong Kong economy in 2016. He forecasts that the gross domestic product growth rate of Hong Kong in 2016 could be as low as 1 per cent to 2 per cent, as compared to 2.4 per cent in 2015, due to the continued decline in external trade and slowdown in inbound tourism and so on. We therefore need to take timely and appropriate measures to stimulate the economy, support local enterprises and safeguard employment.
In this regard, the financial secretary has done a good job in proposing various policies and measures to boost the economic development of Hong Kong that cover a balanced mix of different industries and sectors. These policies and measures include comprehensive support to start-ups and small and medium sized-enterprises,beefing up investment in innovation and technology, various funds and programmes to support the development of local creative industries, and initiatives facilitating Hong Kong to tap into the emerging markets along the “Belt and Road” routes. While the government is moving towards the right direction of introducing all these policies and measures to help diversify the industrial sectors of Hong Kong and seize the opportunities offered by the “Belt and Road” strategy, more could be done by the government in terms of creating a more competitive tax environment in Hong Kong.
Although some foreign investors may still consider Hong Kong as having a simple and low tax regime, this alone will not be sufficient to maintain the tax competitiveness of Hong Kong in the longer term. This is particularly true when Hong Kong is facing fierce competition for foreign investment in the region. For example, our neighbouring countries such as Japan, Malaysia and Singapore all offer specific tax incentives for industries or sectors (e.g. research and development, industrial automation and headquarters operations) that are considered as strategically important or having high growth potential for their countries whereas in Hong Kong, we have offered only limited tax incentives and most of them are targeted at the financial services industry. Tax incentives for other industries and other supportive tax measures – a reduced tax rate for SMEs, for example – are lacking.
Tax treaty network is another area that Hong Kong has lagged behind. Hong Kong has currently signed a tax treaty with 34 countries and has tax treaty with 13 out of the 65 “Belt and Road” countries. On the other hand, Singapore has a much larger tax treaty network with 82 countries, and has signed a tax treaty with 38 “Belt and Road” countries. We need to step up our efforts to expand our tax treaty network, particularly with the “Belt and Road” countries, to strengthen our “super connector” role in order to benefit from the mainland’s “Belt and Road” and “Going Global” strategies.
Looking ahead, the government will need to continue monitor the market situation and develop timely and appropriate policies and measures that would help enrich and upgrade the economic structure in Hong Kong. In this process, the important role played by the timely introduction of corresponding tax measures that support and boost both traditional and new businesses should not be overlooked.
In order to create more businesses and employment opportunities for Hong Kong, we need to maintain and enhance our tax competitiveness. Apart from allocating resources and other supporting measures to help developing those various industries and sectors, the government should also consider introducing specific tax incentives to those industries and sectors, including the innovation and technology industries, the creative industries, SMEs, Fintech and start-ups under this “new economic order”.