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Boosting Hong Kong’s Competitiveness

Hong Kong’s 2015-16 Budget, unveiled by Financial Secretary John Tsang last month, earmarked investment for the city’s start-up ecosystem, creative industries and promoting social enterprise. There were also measures to boost Hong Kong’s competitiveness, which the Hong Kong business community welcomed.

David O’Rear, Chief Economist of the Hong Kong General Chamber of Commerce, highlights some of the key business initiatives, and urges the government to do more to lower business costs.

What are some of your general observations on this year’s budget, particularly relating to initiatives for Hong Kong business?
The Financial Secretary’s Budget aimed to alleviate some of the pain Hong Kong has been going through, and is still facing. In this regard, we consider the objective to have been met.

The short-term focus on cash-flow, particularly for SMEs, was partly addressed by suspending collection of a range of business-related fees in highly specific areas (travel agents, hotels and guesthouses, restaurants and commercial vehicle examinations), which will necessarily only benefit companies in those specific business sectors. While there is room for expanding this measure, it is welcome as far as it goes.

Similarly, extending the SME Financing Guarantee Scheme and expanding the SME Export Marketing Fund will benefit companies specifically qualified and narrowly focused in the areas covered by these schemes especially for the latter. Companies not involved in the export trade do not benefit from these schemes.

Overall, the limited objectives have been achieved, but there are ample areas where investments in future competitiveness made now might well provide dividends decades into the future. We are thinking, in particular, of returning tax rates to their previous, competitive levels.

What more could have been done in terms of measures that can help raise Hong Kong’s business competitiveness?
The crux of Hong Kong’s competitiveness is high-value services at good prices. The services are, by self-selection, world-class; the other side, the cost of doing business, is being neglected.

Dated concepts such as “low and simple tax regime,” need to be replaced with a razor-sharp focus on competitiveness. Singapore offers a two-tiered tax system. Singapore reduced their effective tax rates through group loss relief and loss carry-back. And, Singapore has reduced headline tax rates, although they have introduced a broad-based tax at the same time. These are the things that we should actively consider.

Measures such as rationalising taxation of corporate treasury service centres and broadening the domestic bond market are substantive steps that will attract high value-added services and talent to Hong Kong. The reason they might consider Hong Kong is that we are now meeting the minimum criteria; eg, treasury centre tax treatment. In this regard, the areas addressed have helped to maintain our positioning among a handful of specific sectors.

This year’s budget included measures to promote culture and creative industries. Were there adequate measures to help traditional industries to help them to climb up the value chain?
Support for the high value-added fashion industry will ensure that Hong Kong designers are able to take full advantage of this important industry. However, we are uncertain as to the criteria by which the fashion or film industries were selected for special treatment.

In recent years, the most successful targeted assistance to specific industries were the elimination of taxation on estates and wine, and the easing of visa conditions for Chinese mainland visitors. Here, we experienced great progress and attracted global attention by removing barriers, rather than by applying incentives.

We are also pleased with the proposals to capitalise on the opportunities offered through the Central Government’s “One Belt One Road” initiative, the development of high value-added services in the trading and logistics industry, the development of aerospace financing in Hong Kong and promoting the use of electronic letters of credit to reduce cost. We note that the Government has also drawn up a work programme to enhance Hong Kong’s appeal as a tourist destination. This includes the development of the cruise industry, expansion of the Hong Kong Disneyland and Ocean Park, among other things.

All in all, there is something for all of the pillar industries and beyond.

What about initiatives to encourage start-ups, including from overseas?
Setting up the corporate venture fund will provide greater financial support from private investors to nurture new start-ups in Hong Kong. Since Hong Kong is a net capital exporter, one would expect local investment opportunities to be fully funded, but perhaps there is a gap that needs filling. Taking advantage of Hong Kong’s expertise in financial service and technology, the development of Hong Kong into a financial technology hub is a welcome move.

Was profits tax sufficiently lowered?
The profits tax remains at 16.5 per cent; the level has not been lowered since 2008/09 when a one percentage point down-payment was made on the promised return to the 15 per cent rate that prevailed before the Government briefly ran deficits in 1998/99-2003/04.

While the one-off reductions in the amount of salaries and profits taxes payable are welcome, such an approach does not provide sufficient certainty to enable companies to plan for future expansion. The Chamber had suggested reducing the profits tax rate from 15 per cent to 10 per cent on the first HK$2 million of taxable income. Such a measure would encourage companies to expand, boosting employment opportunities, economic activity and even the Government’s profits tax revenues. As was the case with the elimination of the wine import duty, reducing taxes can lead to greater benefits than the value of the foregone income.

What are your thoughts on how best to broaden Hong Kong’s tax base?
We do not envisage a sudden turn to embrace the GST or something similar. Therefore, we must consider less attractive alternatives, including linking specific revenue streams to specific expenditure requirements. The main challenge is generating sufficient funds to make the effort worthwhile. For example, a 3.5 per cent GST on last year’s HK$1.48 trillion worth of private consumption expenditure would generate HK$44.5 billion, which might be earmarked for retirement protection or healthcare. To raise the same amount through a cross-border tourism tax would require a rate of some HK$750 per visitor.

Related Links
2015-16 Budget
Hong Kong General Chamber of Commerce

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