The government of the Hong Kong Special Administrative Region was urged to leverage its financial resources to upgrade the competitiveness of the city’s tax regime in the 2023-24 Budget and facilitate the long-term development and transformation of the economy, business chambers and global accounting services firms. The Budget will be unveiled on Feb 22.
The 14th Five-Year Plan (2021-25), unveiled by the central government in March 2021, pledged to enhance Hong Kong’s status as an international financial, transportation and trade center, an international asset management center, and a risk management center.
Regarding Hong Kong’s status as an international financial center, global accounting firms Ernst & Young and Deloitte suggested that the HKSAR extend the profits tax exemption to investments in bond funds or qualifying debt instruments; and provide a concessionary tax rate of 8.25 percent on qualifying profits derived by an approved fund manager, including eligible single-family offices, from the provision of prescribed fund management or investment advisory services.
The Hong Kong General Chamber of Commerce, the city’s oldest business chamber representing multinational companies in Hong Kong, said that the government should establish a pre-approval arrangement for tax concession regimes, especially in the case of the impending family-owned investment holding vehicle (FIHV) tax exemption regime, to maintain the city’s status as an international financial center.
The chamber further recommended that Hong Kong learn from the Singaporean decentralization model in cementing the tax regime for family office businesses. The Hong Kong Monetary Authority should therefore play a leading and proactive role in coordinating and possibly administrating the FIHV regime to promote certainty through the implementation of a pre-approval process, it said. The reduction in workload would also allow the Inland Revenue Department to redirect its resources to expediting the review and assessment process for outstanding tax disputes.
The 14th Five-Year Plan is intended to develop Hong Kong into an international innovation and technology hub and a regional intellectual property trading center.
Ernst & Young advised the government to consider developing San Tin Technopole as a preferential tax zone to attract individuals and enterprises to develop their careers and businesses there.
For enterprises, it said the government should launch a qualified refundable research and development tax credit plan, and introduce a concessionary profits tax rate of 8.25 percent. To lure professionals to work in the technology park, the administration can mull levying a salaries tax that only taxes 50 percent of the assessable income; and introducing preferential salaries tax treatment of stock awards or options.
Regarding the city’s status as an IP trading center, EY recommended a patent box regime where a concessionary tax rate of zero percent for the first three years of assessment is applicable if product sales income or license fee income is derived from patents created or developed in Hong Kong.
Deloitte said the government should encourage more multinational companies to relocate IP rights ownership to Hong Kong, so that research and development work regarding IP rights can be conducted.
Hence, the administration should relax the criteria for IP-related R&D deductions, and the deductions regime of making IP-related purchase expenses, Deloitte said. It should also provide deductions for capital expenditure related to IP rights.
By providing a concessionary tax rate of 8.25 percent to local qualifying R&D institutes for conducting IP’s R&D work, the government can spur the development of IP-related R&D activities, Deloitte said. The global accounting firm suggested the government can also offer a preferential tax regime for IP income; for example, the royalty income of enterprises with IP rights and actual economic activities in Hong Kong can be made tax-exempt.
Creating tax certainty for multinational companies operating in Hong Kong is essential. It is also one of the dimensions for evaluating the competitiveness of the city’s tax regime.
EY recommended that the Hong Kong SAR establish a mechanism to continuously evaluate the effectiveness of the tax incentives after their implementation. The mechanism should enable the administration to take enhancement measures when necessary, give timely administrative guidance on new tax incentives to provide tax certainty, and assess the relevant economic benefits of tax incentives if feasible.
To maintain the competitiveness of its tax policy, the chamber urged the administration to devote more resources to the Budget and Tax Policy Unit, staff the BTPU with interdisciplinary expertise such as economists, statisticians, lawyers, accountants and tax administrators, and empower the BTPU to formulate tax policies to help Hong Kong enhance and sustain its tax competitiveness.
The business chamber also suggested the government shorten the statutory assessment period and or review period to enhance Hong Kong’s tax competitiveness.
Hong Kong should expand its network to cover other principal trading partners’ jurisdictions, KPMG and the chamber said. The chamber added that the HKSAR administration should set a specific goal on the number of additional treaties to be entered into over a defined period, and to invest the necessary resources, including increasing headcount, in the respective agencies to achieve such an objective.
oswald@chinadailyhk.com