Legislative Council meeting Bills 2nd Reading – Inland Revenue (Tax Concessions) Bill 2019

Bills 2nd Reading – Inland Revenue (Tax Concessions) Bill 2019

MR CHAN CHUN-YING (in Cantonese):

President, the Inland Revenue (Amendment) (Tax Concessions) Bill 2019 (“the Bill”) seeks to give effect to the proposal in the Budget 2019-2020 (“the Budget”) with a view to alleviating the burden of taxpayers. The specific proposal is to provide a one-off reduction of salaries tax, tax under personal assessment and profits tax for year of assessment 2018-2019 by 75%, subject to a ceiling of $20,000 per case. As Mr Kenneth LEUNG has also mentioned just now, further amendments will be proposed later on, so I will not make any repetition.

Upon passage of the Bill, the reduction will be reflected in taxpayers’ final tax payable for year of assessment 2018-2019. According to the Government’s estimation, the proposal will benefit 1.91 million taxpayers of salaries tax and tax under personal assessment, and 145 000 corporations or unincorporated businesses. The government revenue thus forgone amounts to approximately $18.9 billion, of which $17 billion is from tax reductions of individuals; and $1.9 billion from tax reductions of corporations and unincorporated businesses.

According to the information provided by the Financial Services and the Treasury Bureau, government revenue from salaries tax amounts to $60.8 billion in year of assessment 2017-2018, whilst revenue from tax under personal assessment amounts to $5.3 billion, and revenue from profits tax amounts to $139 billion. Based on these figures, insofar as the targets of this tax reduction proposal are concerned, the proposed reduction of revenue from personal tax is $17 billion, and the concession rate is 26% compared with the total revenue of $66.1 billion in the previous year. I am not able to calculate the concession rate of each individual item since the Government provides no breakdown of salaries tax and tax under personal assessment.

Moreover, the proposed reduction in respect of tax revenue from corporations or unincorporated businesses is only $1.9 billion, and the concession rate is merely 1.4% compared with the revenue of $139 billion in the previous year. That is to say, it is very obvious that this tax reduction proposal targets on individuals and small and medium enterprises (“SMEs”), as a vast majority of SMEs in Hong Kong are owned by one to two owners under their names. It means that this tax concession is estimated to benefit more than 2 million individuals. The overall principle and direction are quite worth supporting, and I will support the Bill.

Yet, President, Hong Kong economy is now slowing down continual under internal and external pressure, and the pressure of living on members of the public is also increasing. I believe the Bill, after passage, can relieve to a certain extent the financial burden of taxpayers. Although I am not a member of the Bills Committee on this Bill, when reviewing a discussion paper of the Bills Committee, I noticed that some members were aware that a two-tiered profits tax rates regime was introduced for corporations and unincorporated businesses in year of assessment 2018-2019. As Mr LEUNG mentioned just now, it is questionable as to whether there is a need to continue offering one-off reduction of profits tax to corporations or unincorporated businesses as corporations or unincorporated businesses liable to payment of profits tax are in fact making profits. On the contrary, it seems not at all equitable that those SMEs which are making no profit at all or even sustaining losses may not benefit from this tax reduction proposal. By the same token, some members have also pointed out that, as the income of some individuals has reduced or they may even have no income in this year of assessment, those who do not have to pay salaries tax and tax under personal assessment in this year of assessment will not benefit from this measure either.

In view of this, the Bills Committee explored with the Administration back then on the possibility of offering these various taxpayers concessions in other aspects. As Mr LEUNG also mentioned just now, regarding relief measures in the form of concessions, the options considered include providing one-off tax rebates calculated with reference to the average amount of salaries tax, tax under personal assessment or profits tax paid for the previous years of assessment, which is also subject to a ceiling of $20,000 per case; or allowing losses made in an accounting year to be carried backward for setting off against the assessable profits of tax-paying corporations or unincorporated businesses.

Just now I heard Mr LEUNG explain that the Government had said it would be very difficult to implement these two proposals, but the reasons cited by the Government are mainly considerations relating to the fiscal management principles and the narrow tax base of Hong Kong. President, please pay note in particular the allusion to the narrow tax base. In fact, the Government has provided reductions of salaries tax, tax under personal assessment and profits tax in every year of assessment since 2011-2012, the Government hence indicated that allowing one-off tax rebate calculated with reference to the average amount of tax paid for the previous years of assessment may result in double deductions of tax for a particular year of assessment, which is a fact.

Moreover, as regards the handling of losses in relation to profits tax, the Government has pointed out that the Inland Revenue Ordinance already allows losses of enterprises of the current year of assessment to be carried forward, without time limit. As a result, there is no need for enterprises to consider treating such losses in a particular year. Allowing losses recorded in a year of assessment to be carried backward for setting off against the assessable profits in the back years may probably result in refund of part of the tax payment which has already been recorded in the accounts and cause abnormal fluctuations in the relevant tax revenue. The Government considers that the current practice can actually assist enterprises in handling losses.

The Government has also supplemented that resources have been specifically allocated under the 2019-2020 Budget to implementing measures to support local SMEs, including extending the measures to help SMEs expand their market coverage, and assisting enterprises in resolving liquidity problems under the SME Financing Guarantee Scheme. In this connection, the Financial Secretary and the Commerce and Economic Development Bureau have recently announced some enhancement measures, and the Hong Kong Monetary Authority has also established with banks a coordination mechanism to assist financing of SMEs, but I am not going to make any elaboration here. The Administration has also waived the business registration fees for 2019-2020, and expanded the scope and funding of the Dedicated Fund on Branding, Upgrading and Domestic Sales. It is believed that these measures have helped to alleviate the pressure of SMEs to a certain extent.

President, whether one is convinced by the Government’s explanation, the crux lies in the narrow tax base of Hong Kong, as I mentioned just now. According to estimates, the revenue from salaries tax, tax under personal assessment and profits tax is expected to reach $232.3 billion in the fiscal year 2019-2020. I certainly have some reservations about the accuracy of this forecast against the latest economic environment currently.

Nevertheless, Hong Kong’s overall economic growth is slowing down markedly as the China-United States trade conflicts continue to ferment. How to maintain the healthy development of Hong Kong’s public finance is an issue we must address squarely. The current fiscal structure of the Government is rather weak and it is not easy to change. The narrow tax base and heavy dependence on land revenue are long-standing problems. The simple and low tax regime has itself determined that the tax base of Hong Kong would not be too broad.

That said, according to the latest information provided by the Government to the Bills Committee, the working population of Hong Kong in fact reaches 3.98 million in year of assessment 2017-2018, but only about 1.88 million of them are taxpayers. This implies that 53% of the working population, that is, more than half of the working population, does not have to pay salaries tax or tax under personal assessment. In addition, the Government even disclosed some time ago that in respect of personal salaries tax, the top 5% taxpayers contributed 63% of the total revenue from salaries tax, reflecting the very high degree of concentration in this regard. What is more, from another perspective, there are 1.27 million corporations and 258 000 unincorporated businesses in Hong Kong in year of assessment 2017-2018, but only 142 000 corporations or unincorporated businesses in total have assessable profits, which means 93% of the corporations or unincorporated businesses do not need to pay profits tax. Among the tax-paying corporations and unincorporated businesses, the top 5% of them contributed over 90% of the revenue from profits tax.

President, I understand that it is difficult to come up with a perfect method in the short term to resolve the problems of high concentration of tax types and taxpayers. The introduction of new tax types will have implications on the appeal of Hong Kong’s simple and low tax regime which is highly competitive and has all along been enjoying international acclaim. Conversely, any attempt to broaden the tax base when sustained surpluses are recorded will invite voices of strong opposition in the community. But anyway, the Government should face up to the difficulties and proactively study new tax types that can be introduced, such as some indirect taxes already studied in the past, in order to broaden the tax base, including the base of taxpayers. Meanwhile, the Government should also study whether it is fairer to provide tax rebates at times when a fiscal surplus is recorded, or whether it is fairer to provide tax rebates when the economy is poor, just like the arrangement now. I believe these issues are worthy of proactive study by the Financial Secretary and the Financial Services and the Treasury Bureau.

President, Hong Kong as an international city must constantly amend our tax laws and regulations closely in line with changes in the international community. The Legislative Council also exercises scrutiny of amendments to various tax laws and regulations from time to time. However, acting proactively and keeping abreast of the times are the factors contributory to Hong Kong’s success in the past. Other countries and regions, such as the United Kingdom and Singapore, also boldly use their tax systems as a tool to promote local economic development and attract talents. Therefore, here I wish to emphasize again that the SAR Government should take the initiative to review the relevant regulations, instead of simply following the successful practice or experience of others, which will only lead to the gradual erosion of Hong Kong’s competitive edges.

In the meantime, the China-United States trade conflicts have yet to come to an end, and there exist a host of uncertainties. If the China-United States trade conflicts continue to escalate, the trading, logistics, and even the financial sectors of Hong Kong may face greater downside risks. As the saying goes, “when a bird’s nest is overturned, no egg can remain intact”, so no one can assert whether Hong Kong’s coffers now inundated with money will suddenly dry up as a result of changes in the macro-environment. Therefore, while the Government has introduced tax concessions costing more than $10 billion on the one hand, it is also necessary to expeditiously study on the other ways to broaden the tax base, alter the revenue structure, or attract more overseas investors to come to Hong Kong long term. At the same time, we must use our fiscal surpluses prudently to stimulate economic activities, which is actually a concept in sustainable public finance management.

I so submit. Thank you, President