IN recent years, tax measures have been introduced in countries around the world to promote industry growth and stimulate economic investment. Following the trend, the HKSAR government has convened the Summit on New Directions for Taxation for the first time recently in the hope of drawing on collective wisdom and absorbing all useful ideas to reform the tax code and enhance Hong Kong's competitiveness. However, it deserves close attention whether Hong Kong's "simple tax system of low tax rates", which has been in place for a long time, will become complicated.
One hundred days after it was sworn into office, the incumbent government has proposed two new tax measures, namely "two-tiered profits tax" and "tax concessions for research and development expenditure". The former is aimed at alleviating the tax burden of Small and Medium-sized Enterprises (SMEs), while the latter is aimed at encouraging enterprises to increase research and development (R&D) expenditure so as to promote innovation and technology. If the Legislative Council adopts the bill, starting from the next year of assessment, the tax rate for the first $2 million of profits of an SME will be lowered from 16.5 per cent to 8.25 per cent, while the first $2 million of its R&D expenditure that is deemed eligible will be subject to a 300 per cent tax concession. SMEs are the backbone of Hong Kong's economy. Numbering 330,000, they make up more than 90 per cent of Hong Kong's enterprises and employ nearly half of the people working in the private sector. The government's support for SMEs is of crucial importance to creating job opportunities, ensuring stable economic growth and promoting diversified development. However, the government has to find specific ways to solve problems, otherwise it will be labouring hard to little avail.
The major problem with the Hong Kong business environment in recent years is high rents. Expensive land and flats have become a sort of "indirect tax", pushing companies' operating costs higher and higher. "Wool comes from sheep," as the saying goes. When people spend, they are taxed in effect as well. Rents that remain stubbornly high have whittled away and even offset the advantage of low tax rates. The government has been unable to deal with the situation because its revenue is inextricably entwined with incomes from real estate; they are inseparable. On the surface, profits tax accounts for a larger portion of the government's source of fiscal income than any other tax. However, if we consider stamp duties and property tax together, we can see that government revenues related to real estate in fact constitute almost thirty per cent of the government's income, which is higher than profits tax. Given the government's inability to address sky-high rents, it can only try a different path by providing tax assistance for SMEs. This shows exactly how ridiculous the situation is. But we are convinced that, in order to improve the business environment and enhance competitiveness, the government should not take the easy way out.
The real problem facing Hong Kong's tax system is not that the tax rates are not low enough. It is that the tax base is too narrow and there is not enough variety in tax types. The government's source of income is too concentrated, with profits tax, income tax, stamp duties, land sale revenues and rates altogether accounting for more than 70 per cent of the government's total revenue. The government has recorded huge fiscal surpluses many years in a row. It has been the case not only because its fiscal philosophy is too conservative and it is too miserly, but also because the real estate market has been bullish and stamp duties and land sale revenues have been high. But "all good things come to an end," as the saying goes. If the property market changes, the government's revenues will experience wild fluctuations. As Hong Kong's population is ageing and its manpower is shrinking, the problem originating from a narrow tax base will become even more conspicuous. To prepare for any contingencies, the government has to study the possibility of broadening the tax base in the long term.