Speech at Panel on Financial Affairs

Detailed proposals for taking forward the eMPF Platform project and related matters

Additional fundings

Mr CHAN Chun-ying said that he supported the proposal. He noted that according MPFA’s original estimate, the cumulative quantifiable future financial savings that could be derived from the implementation of the eMPF Platform would be in the region of $22.5 billion to $23.6 billion spread over 20 years. According to the Administration’s recent update, the latest guestimate was that the total cumulative quantifiable cost savings to scheme members would possibly be in a range of $30 billion to $40 billion in ten years of the operation. He enquired if the same set of assumptions were adopted in working out the latest guestimate. He also sought clarification on whether the seed money and insurance costs (paragraph 25(b) of the Administration’s paper) were recurrent or non-recurrent in nature, and whether the proposed cash buffer of $378 million for the Company (paragraph 25(c) of the Administration’s paper) could be provided in phases and whether the Government could recover the cost when the Company had surplus.

Permanent Secretary for Financial Services and the Treasury (Financial Services) (“PS(FS)”) advised that some $3,900 million of non-recurrent funding provisions had been approved by LegCo for the Project covering the costs on development of the information technology (“IT”) infrastructure and software applications, and the operating costs of the Company in its first two years of set-up. The operating costs of the eMPF Platform thereafter would be recovered from fees payable by trustees for using the Platform, and the estimated operating expenditure of the Company was about $130 million per annum on average. In respect of the proposed additional non-recurrent funding for the Project, they were to assist trustees in their data cleansing and migration, to support the use of Government Cloud, and to provide uncovered seed money, funding reserve and cash buffer for the Company. As regards the proposed $100 million provision for the Company mentioned in paragraph 25(b) of the paper, it was an estimated expenditure to cover the potential liabilities of the Company in performing its duties and functions. Regarding the cash buffer, PS(FS) said that the funding was required for meeting the unforeseeable cash-flow needs of the Company due to fluctuation of the market situation and the fee income. To monitor the use of the capital grant and expenditures of the Company, a tripartite grant agreement would be signed between the Government, MPFA and the Company. The proposed cash buffer would be disbursed to the Company only if necessary having regard to the projected cash flow requirements and financial position of the Company, which would be reviewed under the annual budgeting cycle. Given the Company’s governance structure and financial reporting arrangement, the use of cash buffer if granted would be transparent and subject to close monitoring by the Company’s Board and the Government.

Views and concerns of MPF trustees

Mr CHAN Chun-ying referred to the submission from 14 MPF trustees expressing views and concerns on the Project, particularly the latest guestimate on possible cost savings that could be derived from the implementation of the eMPF Platform, the prevailing scheme administration fees charged by the trustees, immunity and liability of the Platform, etc., and urged the Administration and MPFA to further discuss with the MPF industry and reach a consensus before seeking funding approval from LegCo.

SFST recognized that the concerted effort of the Government, MPFA and MPF trustees was pivotal to the successful implementation and smooth operation of the eMPF Platform. To this end, the Government and MPFA had set up the Working Group on eMPF in 2017 to steer the development of the Platform in collaboration with the MPF trustees. Amongst other things, the Working Group had formulated a set of common standards and technical specifications covering most areas of MPF scheme administration processes, which formed the scope of the tender documents of the eMPF Platform. The Government noted that trustees would incur expenditure for data cleansing and migration in order to transfer to the eMPF Platform. Hence, an additional funding provision of $210 million was proposed to facilitate trustees’ boarding onto the eMPF Platform and managing the associated risks. He added that details of the assistance to be provided to trustees, particularly the first batch for boarding onto the eMPF Platform, would be worked out between MPFA, the Company and trustees during discussions on the transitional arrangements. He stressed that the implementation of the eMPF Platform would not change the existing relationship betweenMPFA as a regulator and the trustees as regulatees. Therefore, trustees should continue to owe fiduciary duties to scheme members and would remain legally responsible for the administration of MPF schemes after the implementation of the eMPF Platform. For other services currently provided by trustees which were not directly relevant to their obligations under MPF legislation (e.g. customer service hotline), or were more personalized or “add-on” services to tailor to different customers’ experience or needs, the eMPF Platform would not take up these functions as they were not core scheme administration functions and trustees or their group companies might continue to provide as part of their business running costs. He assured members that the Government and MPFA would continue to have on-going dialogue with the MPF industry to ensure smooth and secure transition from the existing system to the new eMPF Platform.

Tax concession for carried interest

Development of the private equity fund industry in Hong Kong

Mr CHAN Chun-ying expressed support for the tax concession regime in general. He enquired whether the task force led by the Financial Services and the Treasury Bureau (“Task Force”) had studied other measures to develop Hong Kong as a premier PE fund hub and whether it had made reference to other jurisdictions such as the Mainland and Singapore in developing the regime. Mr CHAN also enquired about the rationale for proposing the concessionary tax treatment to take retrospective effect to apply to eligible carried interest received by or accrued to qualifying carried interest recipients on or after 1 April 2020.

SFST advised that the Task Force would continue to review various measures to promote the development of PE fund industry in Hong Kong. For instance, the Administration was formulating legislative proposals to allow foreign funds to re-domicile to Hong Kong as Limited Partnership Funds (“LPFs”) or Open-ended Fund Companies. As the growth of Hong Kong’s PE fund industry was relatively slower than competitors including Singapore, it was necessary for Hong Kong to step up effort in enhancing its competitive edge on this front. Concerning the retrospective effect, SFST explained that the proposed tax concession regime was announced in the 2020-2021 Budget Speech. The Administration had to take swift action in expediting the development of PE fund industry in Hong Kong.

Implementation details of the proposed tax concession regime for carried interest

Mr CHAN Chun-ying noted that one of the SARs under the proposed tax concession regime was that the operating expenditure incurred by a qualifying carried interest recipient in Hong Kong for the provision of investment management services to a certified investment fund or the ITVF Corporation for each year of assessment should be Hong Kong dollar (“HK$”) two million or more. As some overseas companies registered in Hong Kong generated most of their profits from businesses in other jurisdictions, he asked how the Administration would enforce the above requirement and whether there would be practical criteria for measuring companies’ compliance with the requirement. Mr CHAN also enquired whether the Administration had assessed the impact of the proposed tax concession regime on the proportion of resident and non-resident funds in Hong Kong.

SFST and ED(E)/HKMA responded that the Administration would not restrict the allocation of capital as free capital flow was one of Hong Kong’s existing strengths and an important feature of an international financial centre. Besides, PE funds in general would not concentrate their capital in a single jurisdiction as they looked for suitable investment opportunities around the world. The Administration would thus focus on attracting PE funds to conduct business activities in Hong Kong and the Guangdong-Hong Kong-Macao Greater Bay Area.

Inland Revenue (Amendment) (Qualifying Amalgamations, Specified Assets and Furnishing of Returns) Bill 2021

Implementation details of the legislative proposals

Mr CHAN Chun-ying requested the Administration to elaborate the benefits of the IRO Bill, including the types of economic activities the Administration planned to promote through the Bill. He asked whether the Administration would adopt his suggestion of providing the group loss relief treatment under the IRO Bill to cover certain activities (such as research and development activities and construction of environmental protection facilities) carried out by companies not undergoing amalgamation.

DS(Tsy)2 said that the legislatives proposals on the tax treatment for court-free amalgamation of companies and transfer or succession of specified assets without sale were technical amendments to IRO, and it would be difficult to quantify their economic benefits. Nevertheless, such amendments would provide certainty for companies on the tax treatment concerned, and hence would facilitate the conduct of businesses. Moreover, the legislative proposals on e-filing could lower the compliance costs of companies. On the issue of group loss relief tax treatment, DS(Tsy)2 advised that the Administration had to examine the matter carefully as it would have far reaching implications on the Government’s profits tax revenue. He also pointed out that the Organisation for Economic Co-operation and Development was currently drawing up proposals for imposing a global minimum tax on large multinational companies under the Base Erosion and Profit Shifting 2.0 package, and such proposals would offset the tax benefits of group loss relief should it be offered to such companies.

Filing of tax returns by electronic means

Mr CHAN Chun-ying enquired about the scale of the 2 200 companies which had submitted tax returns through the existing eTax Portal during the year ended 31 March 2020, and measures taken or planned by the Administration for encouraging companies to use the eTax Portal.

DS(Tsy)2 responded that at present most companies using the existing eTax Portal were small companies. Relatively few large companies used the eTax Portal as the system currently could not accept the financial documents submitted by such companies due to its limited uploading capacity. The Finance Committee had approved a new commitment of about $742 million for the enhancement and relocation of IT systems and facilities of the Inland Revenue Department for the new Inland Revenue Tower in the Kai Tak Development Area, including the development of a new Business Tax Portal. It was envisaged that more large companies would submit tax returns by electronic means when the new Business Tax Portal, which would enable the Department to receive voluminous accounting and financial data electronically, was scheduled to be launched in around 2023.

Contribution of Hong Kong to the 12th replenishment of the Asian Development Fund

Hong Kong’s contributions to the Asian Development Fund

Mr CHAN Chun-ying supported Hong Kong to continue contributing to ADF 13. He enquired about the contribution to be made by Singapore and its burden share ratio in ADF 13. Pointing out that Hong Kong would suffer from fiscal deficits in 2021, Mr CHAN enquired whether the 11-year encashment schedule could be adjusted so that Hong Kong could pay a lower rate of contribution in the first few years of the schedule.

USFST responded that Singapore’s current shareholding in ADB and burden share ratio were both lower than those of Hong Kong. Singapore had maintained its burden share ratio in ADF 13 (which amounted to US$ 4.23 million). Many ADB members had indeed maintained or even increased their burden share ratios in ADF 13. As regards the 11-year encashment schedule, USFST pointed out that it was set by ADB after deliberation amongst Members.
Hong Kong’s representation at the Asian Development Bank

Mr CHAN Chun-ying enquired whether Hong Kong’s representation arrangement at ADB (i.e. representation by the Australian Director in the Board of Directors of ADB) would remain unchanged, and about the details of the Hong Kong officers attached to the office of the Australian Director.

USFST confirmed that Hong Kong’s representation arrangement at ADB remained unchanged. The Administration attached a Senior Administrative Officer to the office of the Australian Director from 2017 to 2019, and planned to deploy another secondee to the office in 2025.