Sweet and sour Hong Kong budget: John Tsang criticised for avoiding tax review in his ‘sugar rush’ plan

Financial Secretary John Tsang Chun-wah’s decision not to touch on a review of Hong Kong’s tax regime while pushing through a “sugar rush” budget laden with sweeteners has sparked criticism he is eroding the city’s competitiveness.

The accounting industry, led by its regulator, widely criticised Tsang for missing the chance to reform the outdated tax system – which has stayed more or less the same for the past 40 years – and pushed for a review in the face of a looming fiscal deficit.

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Some academics rekindled the options of introducing a goods and sales tax and a capital gains tax, but argued that the Basic Law, which stipulated a “low tax policy” in the city, meant the government’s hands were tied.

In Wednesday’s budget speech, Tsang unleashed a package of sweeteners worth HK$38.8 billion, including tax concessions that allow about 200,000 people to slip through the tax net.

“What makes Hong Kong attractive is the simple and low tax system,” Tsang said yesterday. “It is difficult to expand the tax base.”

Without elaborating on the difficulties, he said less than half of the city’s 3.8 million working population paid tax and that the top 5 per cent of taxpayers made up about 60 per cent of the city’s salaries tax. He estimated salary tax revenue would be HK$60.5 billion in the 12 months ended March 31 next year, or about 12 per cent of the government’s revenue.

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The tax base of companies does not fare better. Only 9 per cent of Hong Kong companies pay tax and the top 5 per cent contribute to 85 per cent of the total. Profits tax is expected to total HK$138.1 billion by March 31 next year, and accounts for the biggest chunk of the government’s revenue at 27.7 per cent.

The accounting regulator, the Hong Kong Institute of Certified Public Accountants, criticised the budget for failing to “address the larger issue of long-term and international competitiveness”.

It welcomed the relief measures, but deemed their impact limited, and criticised the budget for failing to address the ramifications of bigger picture issues such as how a shrinking workforce will affect business development and tax revenues.

The non-recurring relief measures include a profit tax cut for smaller firms, business registration fee exemptions, a HK$500 million voucher scheme for companies climbing the technology ladder, a one-year waiver on licence fees for hotels and guest houses, salaries tax allowances and rates exemptions covering all four quarters.

“Given the financial secretary’s claim on a government commitment to modernise the tax system, the lack of any mention of a review and [the failure to heed] calls to establish a tax policy unit is surprising,” the institute’s Curtis Ng said in a statement.

Tsang said the government would take a three-pronged approach – revenue, expenditure and savings – to tackle the problem of an ageing population. By 2041, one in every three Hong Kong people will be aged 65 or above.

Accounting firm PwC welcomed the relief measures, but argued that the government should conduct a “long overdue” comprehensive review of the Inland Revenue Ordinance once the “sugar rush” subsided.

Tsang said a number of initiatives such as the future fund, which is aimed at generating more stable income through investments, would help cushion a looming deficit. If the government goes ahead with its spending on health care reform and pension protection, Hong Kong will plunge into a fiscal deficit two years in a row from 2018 to 2020.

Hong Kong General Chamber of Commerce chairman Y.K. Pang was disappointed that the chamber’s proposal for a progressive two-tier profits tax rate for companies was ignored. It wants the tax rate on the first HK$2 million of taxable profits to be cut to 10 per cent from the current 16.5 per cent.

“We will raise this again in the 2017 budget discussion,” he said.

Billy Mak Sui-choi, an associate professor of finance and decision sciences at Baptist University, said the government’s hands could be tied in overhauling the tax regime as Basic Law articles 107 and 108 stipulate the principle of “keeping expenditure within the limits of revenues in drawing up its budget”, and “taking the low tax policy” previously pursued in Hong Kong as reference.

“There are some options on new taxes Hong Kong can look at,” Mak said. “However, if the side-effects of some options such as a goods and sales tax and a capital gains tax are greater than the gain, why should we introduce them?”

Additional reporting by Tony Cheung