The Business Times
20 Feb 07
Hong Kong is expected to follow Singapore’s example with a corporate tax cut in the upcoming budget, although the two cities’ motives for doing so may be at odds with each other.
Press reports in Hong Kong about the recent Singapore Budget largely saw the decision to slash corporate taxes as a move to narrow its competitive gap over Hong Kong, while also boosting investment and job creation.
In contrast, Hong Kong is likely to cut its corporate and salary tax rates in the Feb 28 budget amid strong public pressure to share a recent windfall in investment income. It is not being seen as a long-term trend to bolster competitiveness.
The English-language South China Morning Post dubbed Singapore’s recent decision to cut corporate taxes for the first time in three years as part of an on-going move to bolster the city’s competitiveness against lower-cost nations in the region, while creating new sources of revenue.
Likewise the Standard, also an English-language daily, saw the move as an attempt to narrow competition with Hong Kong to lure investment to Singapore’s shores.
In turn, this would exert pressure on Hong Kong to follow suit and cut its tax rates. By reducing its tax rate to 18 per cent, Singapore is within touching distance of Hong Kong’s profit tax rate of 17.5 per cent, the newspaper noted.
A recent pledge was made by Chief Executive Donald Tsang to cut Hong Kong’s profit tax and salary tax to 15 per cent. While corporate tax is at 17.5 per cent, salary tax now stands at 16 per cent.
Mr Tsang has said however that he will only do this ‘if economic and financial conditions allow’.
Last year, the city made exceptional gains on its Exchange Fund investments, with returns soaring to HK$103.7 billion (S$20.3 billion), the second-highest figure ever recorded. The sum was almost triple the HK$37.8 billion earned in 2005.
Nearly HK$30 billion of this jackpot is attributable to the city’s fiscal reserves, 60 per cent more than the HK$18.2 billion estimated in last year’s budget.
Being so flush with cash, public pressure has grown for this extra money to be given back to the population in the form of tax relief.
Unlike Singapore, however, Hong Kong does not have a goods and service tax (GST) to make up any shortfall in government revenue. In this year’s Budget, Singapore increased its GST by 2 percentage points to 7 per cent.
‘There’s room for the government to cut the tax rate in Hong Kong,’ said Citigroup economist Joe Lo. ‘But I think it’s independent of what’s happening in Singapore.’ He stressed that the most important factors when considering any tax cut in Hong Kong are economic conditions and the government’s financial position, both of which have improved over the past year.
In the longer term, policy-makers must also take into account the city’s narrow tax base. A proposal to introduce GST in Hong Kong was recently shelved amid public opposition, but it is something the government will have to revisit if it wishes to widen the tax base away from a reliance on land sale levies.
‘Singapore has increased GST to compensate for the corporate tax rate,’ Mr Lo explained.
‘The Hong Kong government, after several months of discussion, has decided to defer GST. Right now, the government is likely to keep the present (fundamental) tax system unchanged,’ he stressed.