The chief executive of Hong Kong on 12 October 2017, in her first policy address to the Legislative Council, set out a broad range of measures to enhance the economy and address various social issues, and proposed a number of tax-related measures.
The following provides a brief summary of the tax proposals.
A central point of the tax measures is a proposal to introduce a progressive profits tax rate for companies. Under the proposal, the first HK $2 million of profits earned by a company would be taxed at one-half the current tax rate (i.e., to be taxed at a rate of 8.25%). The remaining profits would continue to be taxed at the existing 16.5% tax rate.
There would be an “anti-fragmentation measure” to prevent corporate activities from being divided among a large number of companies that could benefit from the lower tax rate—each group would have to nominate one company in the group of companies to benefit from the progressive rate. The proposed rate reduction could apply as early as the 2018/19 year of assessment.
As part of a broader plan to increase the amount of research and development (R&D) investment made in Hong Kong, the government would introduce a tax incentive through enhanced deductions for qualifying expenditures.
The first HK $2 million of expenditures would qualify for an enhanced 300% tax deduction with remaining expenditure enjoying a 200% deduction. These new rules could apply as early as the 2018/19 year of assessment.
As with any tax measure, the key will be understanding what expenditures qualifiy and the strictness and complexity of the measures the Inland Revenue Department would take to police these rules. Taken at face value, this incentive is globally competitive.
The chief executive noted that, to support the voluntary health insurance scheme, tax legislation would be amended to offer tax incentives, presumably in the form of a capped deduction against salaries tax, for individuals to buy health insurance products.
The chief executive said that she hopes to expand Hong Kong’s network of comprehensive income tax treaties to 50 agreements over the next few years. There would be particular focus on the “Belt and Road” countries (given Hong Kong’s role as a finance centre for the Belt and Road initiative).
The chief executive also signalled continued support for dialogue on the continuing development of tax policy in Hong Kong. This includes her attendance at the “Summit on the Directions for Tax Policy” later this month.
Overall, the proposals continue a trend of enhancements to the Hong Kong tax system, to maintain its position as a leading international business centre in Asia. Tax professionals expect the progressive tax rate change will grab most of the headlines and will benefit a large number of smaller businesses that are the backbone of the Hong Kong economy. However, for medium and large enterprises, the enhanced R&D deduction scheme, if implemented with sensible rules that make it relatively simple and easy to use, could provide greater benefits and encourage more economic activity in Hong Kong.
Read an October 2017 report prepared by the KPMG member firm in Hong Kong
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