Government Budget

Transcription

1 Restoring the fiscal position to a sound footing Government Budget While Hong Kong s strong economic growth in 2005 and the buoyant stock and property markets are widely expected to benefit the public coffers from a rise in revenue, it is still premature in concluding that the deficit problem is behind us. In fact, Hong Kong s direct tax system remains narrowly based. Without any major changes to the revenue and expenditure structure of the fiscal system, closing the deficit gap in the recurrent operating account will continue to be a formidable task for the Government. Past experience has shown that premiums from land sales can be extremely volatile, particularly during a property market downturn. Instead of counting on land premiums and sales proceeds of government assets to balance the budget, the Government should tackle the deficit problem by strictly controlling operating expenditure and re-examining operating income sources. In last year s Budget Speech, the Financial Secretary reiterated the three fiscal targets of the Government, namely, reducing operating expenditure to $200 billion by , striving to restore fiscal balance in the operating and consolidated accounts by , and bringing public expenditure down to 20 per cent of GDP or below. While fully supporting these targets, we are wary of the risk that fiscal discipline may loosen when revenue is back on a rising trend. We strongly urge the Government to resist any calls for increasing public expenditures unless they are well justified and proved to be in Hong Kong s long-term interest. Besides, the public sector must continually seek to improve efficiency, minimise waste, develop more cost-effective ways to deliver services, and benchmark itself against the best private sector practices. Privatization and public-private partnership should be stepped up as such efforts would help enhance efficiency and reduce the size of the Civil Service. The Government should also regularly review its scope of services with a view to outsourcing the non-core ones to the private sector to take advantage of its better efficiency and service standards. Reverting to the territorial concept in tax assessment Hong Kong manufacturing companies entering into processing or assembly arrangement with Mainland entities were previously allowed to enjoy concession in making offshore profit claims in accordance with the Department Interpretation and Practice Notes No. 21 (DIPN 21) issued by the Inland Revenue Department (IRD) in March Under DIPN 21, for a Hong Kong manufacturing business involving in the manufacturing activities in the Mainland (in particular in the supply of raw materials, training and supervision of the local labour), the profits on the sale of the goods can be apportioned on a 50:50 basis (i.e. 50% of the manufacturing profits derived by the Hong Kong manufacturing business is not taxable in Hong Kong). We note with concern that the IRD has in recent 1

2 years changed its stance on the tax treatment of Hong Kong entities engaged in such processing or assembly arrangement and started requiring all their manufacturing profits so derived to be taxable in Hong Kong. In this connection, it is noteworthy that DIPN 21 specifies that certain activities performed in Hong Kong will not, of themselves, constitute the carrying on of a business in Hong Kong. These include: issuing or accepting an invoice to or from a customer or supplier outside Hong Kong on the basis of contracts of sale or purchase already effected by an associated company situated outside Hong Kong, arranging letters of credit, operating a bank account or maintaining accounting records. Provided that these activities do not include the acceptance or issue of sale or purchase orders in or from Hong Kong, the profits would not be taxable. Notwithstanding these guidelines, the IRD has recently tightened the requirements for establishing or maintaining offshore profit claims with the use of the totality of facts principle whereby all the circumstances and all the activities which generated the profits will be considered in determining the source of profits. Under this principle, the above-mentioned activities could be regarded as business activities carried out in the territory and the profits would become taxable in Hong Kong. The territorial concept is fundamental to the taxation of corporate profits in Hong Kong, where only profits which arise in or are derived from Hong Kong are liable to profits tax. We fear that the adoption of the totality of facts principle in reviewing offshore profit claims may undermine the simplicity and certainty of Hong Kong s tax regime and discourage manufacturing and trading firms to maintain their headquarters in Hong Kong. We hope the Government will look into this matter urgently and revert to the territorial concept in tax assessment, thereby strengthening Hong Kong s position as a preferred trading hub. Promoting high value-added industries In our submission to the Chief Executive on the Policy Address, we pointed out the need for Hong Kong to identify and develop new industries as growth engines to drive and sustain our economic development in the longer term. We also suggested that Hong Kong should model on the success of other small-scale and open economies (e.g. Switzerland, Denmark, Finland and Singapore) where the government plays a strong leading and supporting role in the focused development of their niche industries. Innovation and technology are crucial elements in driving the advancement of Hong Kong s industries. Last year, the Government revised its innovation and technology strategy and proposed using the Innovation and Technology Fund (ITF) to establish R&D centres for four technology fields. While agreeing with the direction of the new strategy, we feel that the existing support provided by the Government through the ITF is inadequate to upgrade Hong Kong s R&D capabilities to a level comparable to its overseas competitors. The Government may need to introduce other complementary measures to attract major foreign technology companies to set up R&D centres in the territory, thereby cultivating a more 2

3 vigorous innovation and technology culture in the local business community. Our recommendations in this connection were already contained in a position paper submitted to Financial Secretary in November In the paper, we argued that incentives in the form of triple tax deduction on R&D and design expenditures are by far the most effective means to encourage companies to expand investment in such strategic activities. A recent study report by OECD provides data supporting our recommendations. The study observed that OECD member countries had placed greater emphasis on using indirect measures including tax incentives to boost innovation and R&D in the private sector. It also found that tax incentives had a positive effect on business R&D. In light of this, we hope the Financial Secretary will re-consider our recommendations and include them in his new budget proposals. Moreover, as innovative design will enhance the value-added contents of products made by Hong Kong companies, it should be incorporated in the Government s overall innovation and technology strategy. The DesignSmart Initiative and the establishment of the Inno Centre are important steps in the right direction to promote Hong Kong s design development. We suggest that the scope and scale of these programmes be expanded to strengthen the Government s support for this sector. Promoting Hong Kong s recycling industry According to the Government s current schedule, construction of the first phase of the Eco-Park will be completed by end Aside from providing an important infrastructure for the long-term development of environmental industries, the Eco-Park will serve as a showcase to demonstrate to the world Hong Kong s commitment to environmental protection. In our view, environment protection is essentially led by government action. The escalating growth of municipal solid waste has become a pressing problem for Hong Kong which the Government needs to address urgently. The sustainable way to solve this problem is to encourage reuse and recycling. Unfortunately, up till now the community at large is still not very receptive to environmental and recycled products. It is imperative that the Government takes the lead in creating a vibrant market for such products to bolster their usage. One possibility is for the Government to stipulate in its procurement policy a requirement that a percentage of the procured items (e.g. 15 to 20 per cent) must be made of recycled materials. Similarly, the use of environmental and recycled products should be made a mandatory requirement for all new public works, government buildings and public housing estates. We understand that the Government is pondering the introduction of a series of producer responsibility schemes, including a green tax on vehicle tyres. To ensure that such schemes will be successful in minimising waste, the adoption of a market-driven approach is of crucial importance. It is also necessary for the Government to provide sufficient incentives to change consumer habits. For this purpose, we recommend the establishment of a tax rebate system to encourage people and companies to reduce waste and other pollution sources and to use more environmental and recycled products. 3

4 Maintaining the territory s status as a regional logistics hub Hong Kong s status as the logistics hub in the region is now facing intensifying competition from Shenzhen. For instance, in this year s first ten months, Hong Kong s total container throughput has only increased 1.7% year-on-year to 18.6 million TEU, whereas the corresponding figures for Shenzhen were 19.9% and 13.4 million respectively. We are afraid that if the present trends continue, Hong Kong will before long lose out to its rival in the race for the region s leading logistics hub. In stark contrast to Shenzhen s continued improvement in vessel frequency and handling efficiency, the competitiveness of the Hong Kong port has been significantly eroded in recent years by expensive terminal handling charges and high inland transportation costs. Given the importance of the transport and logistics sector to the economy, there is an urgent need for the Government to tackle the problems faced by this sector and to take active steps to help the operators regain their competitiveness. The Hong Kong-Macao-Zhuhai Bridge, as a convenient crossing between Hong Kong and west bank of the Pearl River, will help reduce the costs and time for transporting goods between the two places. Early completion of this bridge is of vital importance to Hong Kong in attracting cargoes from Pearl River West to use our port facilities for overseas shipment. The Government should speed up the requisite advance work and strengthen collaboration with the relevant Mainland authorities with a view to commencing construction at an early date. The Government should also take the following steps to enhance Hong Kong s logistics hub status: Repositioning Hong Kong as a feeder port of South China and engaging the Guangxi Government in forming a strategic partnership to facilitate the feeding of goods produced in the province to Hong Kong s terminals; Maintaining a close dialogue with the container terminals, liner companies and other interested parties to progressively reduce the terminal handling charges and other surcharges; Strengthening co-operation with the Mainland authorities and removing bottlenecks to speed up cross-boundary cargo clearance; Expanding the capacity of the river trade terminal and related facilities to accommodate the increased volume of cargoes transported to Hong Kong by river vessels; and Building a new boarder crossing at Liantang to further facilitate traffic flow between Hong Kong and east Guangdong. Helping Hong Kong s service industries expand business in the Mainland 4

5 While Hong Kong is predominantly a service economy, the Mainland s service industries are relatively underdeveloped with immense expansion potential. The Government should support and assist Hong Kong s service companies in tapping the vast business opportunities available in the Mainland. Although Cepa has provided a framework for Hong Kong s service providers to enter the Mainland market, various administrative and policy hurdles still remain. These include excessively high investment thresholds and complicated licensing procedures. The absence of a mechanism for mutual recognition of professional qualifications has also deterred many interested companies from setting up business operations there. To address this issue, the Government should join hands with Mainland authorities to closely monitor Cepa s implementation. On this, it would be desirable to compile a database of Hong Kong service companies which have successfully developed business in the Mainland under Cepa, as well as the location, nature and scale of such operations. The Government should proactively approach local companies in those sectors with a low participation rate in the Mainland to understand their problems, and work with its Mainland counterparts to look for a solution. Attracting multinational and Mainland enterprises to establish regional headquarters in Hong Kong Hong Kong s unique advantages, including a simple and predictable tax system, low tax rates, free flow of information, world class infrastructure and the absence of foreign exchange control, are the envy of many economies. Hong Kong should widely promote these advantages to multinational and Mainland enterprises to attract them to set up regional headquarters here. Last year, the State Council and Ministry of Commerce jointly announced Provisions for Approving Mainland Enterprises to Establish Companies in Hong Kong and Macao. Providing for simplified approval procedures for mainland enterprises to invest in Hong Kong, this document embodies the Central Government s policy to encourage their maximum use of Hong Kong as a facilitator for business expansion overseas. According to a recent survey conducted by the Hong Kong Trade Development Council, the top three problems confronting Mainland enterprises in establishing a presence in Hong Kong are: Hong Kong s operating costs being too high, lack of information about setting up and doing business in Hong Kong, and strict immigration control on Mainland residents working and staying in Hong Kong. Active steps should be taken by the Government to address these problems. For instance, the Government can mount large-scale publicity campaigns in major Mainland cities to promote Hong Kong s advantages and organise frequent seminars to disseminate information on Hong Kong s business environment and the procedure for setting up business. The Government should also relax the existing strict immigration requirements on Mainland businessmen. 5

6 Whether a taxation regime is friendly to business is an important consideration for companies in deciding their location. The recent abolition of estate duty will give Hong Kong an extra advantage as a premier asset management centre. The Government should widely promote this in the international business community through its global network to ensure that both foreign and Mainland enterprises are well aware of its positive implications for investors. Tackling the aging population and manpower mismatch The aging population and manpower mismatch are two major threats to Hong Kong s economic development in the longer term. For instance, the rise in the number of elderly in the population may result in depletion of the public purse as the need mounts to increase the expenditure on healthcare and social welfare for this group of citizens. As a first step to solve this problem, the Government should consider providing tax allowances to younger people to encourage them to purchase medical insurance, thus reducing their reliance on public healthcare provision when they age. Hong Kong people working in the Mainland are now required to contribute to its social insurance system. Apparently, many of these workers who are not covered by Hong Kong s MPF Scheme will choose to reside in Hong Kong after retirement. This is a matter of concern to us due to its implications for Hong Kong s social security system. The Government should look into the issue and work out a feasible arrangement to cope with the situation. In his Policy Address, the Chief Executive proposed to introduce a new admission scheme next year to attract talented people from the Mainland and overseas to work in Hong Kong. We fully support this scheme as a larger pool of talent will increase our competitiveness, make Hong Kong more prosperous, attract more capital and create more jobs. We also hope that this Scheme will help ease Hong Kong s manpower mismatch problem. Enlarging the talent pool and upgrading the skills of the local workforce are equally important to Hong Kong in its ongoing transformation into a high value-added and knowledge-based economy. In order to encourage local workers to pursue life-long learning, the Government should further expand the scope for tax deduction of self-education expenses by salaried taxpayers. Developing the Closed Frontier Area We welcome the Government s proposal to significantly reduce the size of the Closed Frontier Area. In planning the related development, the Government should take full advantage of the geography of the land to support the development of emerging industries. One option the Government can consider is the development of processing zones, logistics parks or R&D centres to attract local enterprises to conduct high value-added economic activities there. December