Renovating the Hong Kong Revenue Regime

RENOVATING THE HONG KONG REVENUE REGIME: THE LOCAL, CROSS-BORDER & INTERNATIONAL CONTEXTS

Taxation Law Research Programme (TLRP)

TLRP Fouth International Conference

31 October 2015

COMPARATIVE REVIEW SESSION

• Professor Adrian Sawyer (University of Canterbury, New Zealand) | Comparative Tax Reform Approaches: New Zealand & Australia
• Nolan Sharkey, Winthrop Professor of Law UWA Barrister – Francis Burt Chambers | Renovating the tax base: China, Hong Kong and Singapore with a focus on offshore jurisdiction

RENOVATION AGENDA – LOCAL CHALLENGE

• Associate Professor Wilson Chow (HKU) | Tax Reform Options and Expenditure Challenges
• Professor Richard Cullen (HKU) | Renovating the Hong Kong Revenue Regime

THE RENOVATION AGENDA CROSS BORDER & INTERNATIONAL CONTEXT

• Ms Li, Xin (Haikou Collegeof Economics) and Professor Yang, Bin (Xiamen University) | The Tax Arrangement betweenMainland China and Hong Kong-Its Characteristics,Issues and Solutions
• Professor Zhu, Yansheng (Xiamen University) | How to Respond by Hong Kong to the Revision of Special Tax Adjustment Rules in Mainland?
• Dr. Doreen Qiu (Xiamen University) |Controlled Foreign Company (CFC) rules and the latest development in the PRC

OVERVIEW

Hong Kong has developed, over decades, a Revenue Regime (RR) that is astonishing for its simplicity, stability and adequate resourcing of public services – not least when compared to other developed jurisdictions, most of which need to cope with entrenched, far more complex tax systems. Articles 106-108 of the Basic Law also direct that these fundamentals of the RR should be retained. The system’s long history of satisfactory performance, however, does not imply or guarantee future fitness. More than ever, we need to understand the strengths and weaknesses of the RR.

Increasingly, the Hong Kong RR operates within the context of policy-shaping interaction both with the Mainland Tax System and the International Tax System. For example, there are notably increased calls, on the HKSAR, for detailed exchange of tax-related information and the Base Erosion and Profit Shifting (BEPS) Project initiated within the influential Organization of Economic Cooperation and Development (OECD) is aimed at re-setting the International Tax System agenda.

The RR in Hong Kong has historically, and especially since World War II (WWII), typically generated a yearly surplus of public revenues (over recurrent expenditure). Unlike the clear majority of developed jurisdictions (post WWII): Hong Kong has been able to operate without the need to rely on debt to finance either current expenditure or, normally, capital expenditure; and it has accumulated substantial official reserves. The RR may ‘look’ unusual – but no matter what challenges have been thrown at it pre-or-post-1997 including the Asian Financial Crisis which began in mid-1997 and continued to have a negative impact on Hong Kong public revenue for 6 to 7 years with Hong Kong relying on deficit financing (from official reserves) for the longest period since the end of WWII, it seems to hold steady and then bounce back.

Some fundamental features of the RR as they have applied over the last several decades include: Limited Size of Government – Government Expenditure/GDP: 15%-18% of GDP; Tax: Maximum rate on incorporated entities: typically 16.5%; Unincorporated 15% (rates subject to increases on occasions); and Salaries Tax: Maximum average tax rate on net income, typically 15%. Moreover, as noted, Hong Kong has virtually no debt – and also substantial (indeed, massive) official reserves. The RR has retained, over many decades, a basic simplicity which has: (a) kept compliance-costs for taxpayers notably lower than is the case in most comparable jurisdictions; and (b) played a significant role in keeping the RR relatively “understandable” for most taxpayers.

The HKSAR government has begun to pay notably greater attention to the need address a range of longer-term livelihood issues. Policy areas of concern include: tackling poverty and inequality; the housing (and livelihood) aspirations of Hong Kong people; ensuring proper welfare support for an ageing population and addressing an array of significant environmental (and energy) concerns. Initiatives aimed at addressing each of these challenges will require significant public expenditure backed up by a sustainable RR.

The RR will also need: to support and further develop the full span of Hong Kong’s first-rate general infrastructure; to meet and respond well to the growing economic – and fiscal – interaction with Mainland China; and to respond effectively to international economic and fiscal developments – arising from the BEPS Project, for example.