Hong Kong Can't Rest Easy As 20th Anniversary Of Handover Looms - PwC

Tom Burroughes

27 June 2017

Hong Kong, the jurisdiction that on 1 July marks 20 years of its handover to China by the UK, cannot go on relying on low tax rates as a primary driver of its international business as other countries trim their rates, according to PricewaterhouseCoopers.

The jurisdiction recently created a tax policy unit and a range of tax incentives pitched at attracting financial services – moves that PwC applauded – but the professional services firm went on to say that Hong Kong must do more. The tax unit, for example, must exploit experience of foreign nations such as Australia to encourage businesses and professionals to help craft tax policy.

The comments come as Hong Kong faces challenges from up-and-coming Shanghai and other mainland China cities as well as continued competition from Singapore as a wealth management and financial services sector.

“Low tax rates should not be the only way for Hong Kong to stay competitive. As a matter of fact, disparity of corporate tax rates between neighboring countries such as Singapore and Hong Kong has been narrowing down. At the backdrop of Donald Trump’s tax reform in the U.S. and the gradual reduction of the corporate tax rate in the UK for staying competitive, it’s a must for Hong Kong to foster the development of potential industries to cope with the transformation of economy. The new Tax Policy Unit should come up with more effective tax policies for reindustrialization and promoting the innovation and technology industry, PwC Hong Kong tax partner Agnes Wong, said.

There have been a number of measures by Hong Kong to retain its tax-friendly status; this year, tax concessions for aircraft leasing and financing were introduced. In 2016, legislation was written to allow tax deductions for expenses incurred by firms carrying on an intra-group financing business and cut profits tax of qualifying treasury centres by half. In 2015, profits tax emptions for offshore funds were extended to offshore private equity funds.

The standard individual tax rate in Hong Kong is 15 per cent and the top rate of corporate tax is 16.5 per cent.

The jurisdiction was ranked top for economic freedom in a study issued this year by the US-based Heritage Foundation, scoring 89.8 out of a possible top figure of 100. “Hong Kong has demonstrated a high degree of economic resilience and remains one of the world’s most competitive financial and business hubs,” the report (2017 Index of Economic Freedom, page 130) said.