KPMG welcomes the Hong Kong SAR Government’s Summit on New Directions for Taxation held today (23 October 2017).
The Summit examined the global trend for tax policy and tax initiatives for fostering economic development and provided a clear signal of a more proactive approach towards the use of tax measures to support economic growth.
Ayesha Lau, Managing Partner of KPMG Hong Kong and a panel speaker at the Summit, says: “Tax policy can be a very powerful and effective tool in support of economic goals. Traditionally, Hong Kong has adhered to two principles for its tax system - simplicity and low tax rates. Even though these principles may have served Hong Kong well in the past, we really must consider whether they are sufficient for the current economic environment. I support the addition of ‘competitiveness’ as a value proposition for Hong Kong’s tax system.”
Many countries around the world are making use of their tax systems to attract investment. These countries recognise the importance of incentivising business investment and entrepreneurial risk taking by using targeted tax measures and they have achieved considerable success.
Lau says: “Overall, there is a general trend for countries to reduce corporate tax rates and to modernise their tax systems as a means of supporting local businesses and attracting foreign capital and investment. With this changing landscape, Hong Kong cannot simply rely on its low tax system to stay globally competitive, particularly when Hong Kong’s 16.5 percent corporate tax rate may no longer be ‘low’ benchmarked against latest international developments.”
The Base Erosion and Profit Shifting (BEPS) Initiative launched in 2013 is the most concerted international effort to date in the combat of cross-border tax avoidance and tax evasion. However, the BEPS Initiative does not mean that countries can no longer determine their own tax policies or provide tax incentives. So long as taxation rules are aligned with economic substance and value creation, are operated under a transparent tax environment and tax incentives are not ring-fenced against the domestic economy, jurisdictions retain their sovereign rights to determine what to tax and how much to tax.
Lau provides examples on tax measures which could support Hong Kong’s economic growth: “The introduction of group tax loss relief to allow the transfer of tax losses from one group company to be set off against the taxable profits of another group company would bring Hong Kong in line with other major international financial centres and would encourage investment, innovation and risk-taking. Providing an enhanced tax deduction for R&D expenditure would encourage more R&D activities in Hong Kong. Introducing a regional headquarters tax incentive would enhance Hong Kong’s attractiveness as a location for regional headquarters, complementing the tax incentive introduced last year for corporate treasury centres. Adding a specific personal tax exemption clause in Hong Kong’s double tax agreements for academics and researchers conducting teaching and research in the treaty jurisdictions would increase the volume and improve the quality of R&D activities. Shortening the time-bar period from the current six years to four years would improve tax administration and certainty for business on their tax affairs.”
Another example of where tax policy can make a difference in driving economic growth is in the asset management sector. The asset management industry represents an important and fast growing part of the financial services sector within Hong Kong. As the middle class of China continues to grow, Hong Kong's asset management sector will play a vital role for supporting wealth management across all of China. There is therefore a clear economic imperative for Hong Kong to facilitate the continued growth and development of the asset management industry. In recent years, Hong Kong has introduced a number of initiatives with respect to fund taxation and regulatory regimes with the aim of growing the asset management industry. However, more needs to be done to strengthen Hong Kong’s position as an asset management hub especially in the face of competition from other asset management hubs, most notably Singapore in the Asian region.
The Government has introduced policies designed to promote Hong Kong as a hub for private equity and venture capital funds, and is looking at new ideas to encourage funds to establish their funds vehicles in Hong Kong. The latter initiative is particularly focused on attracting those successful Chinese fund managers seeking to go offshore to raise new capital.
Darren Bowdern, Partner and Head of Alternative Investments at KPMG Hong Kong, says: “Given the importance of the asset management industry, more needs to be done to attract mobile capital, particularly in the critical start-up phase where traditional financing can be hard to come by.”
Hong Kong should not only be attracting fund managers to use Hong Kong as their headquarters or regional hub, but they should also be encouraging funds to invest into Hong Kong businesses.
Bowdern highlights the broader tax policy considerations: “In July 2015, the offshore funds tax exemption was extended to investments by offshore funds into offshore private companies as well as certain Hong Kong and non-Hong Kong incorporated special purpose vehicles used by PE funds to hold offshore private companies. However, the exemption does not apply to investments in Hong Kong private companies and non-Hong Kong private companies with substantial operations in Hong Kong. The Hong Kong SAR Government’s stated policy is to develop areas in innovation and technology. It is therefore important to encourage investments and business especially for our home grown local companies and start-ups, and to place them at least on a level-playing field as non-Hong Kong private companies to investors from a tax perspective. We see a clear case for the extension of the offshore PE funds tax exemption to cover investments in Hong Kong private companies and non-Hong Kong private companies with substantial operations in Hong Kong. ”
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