Hong Kong should reform tax code to spur entrepreneurship amid slumps and help city catch up with regional rivals
- Financial Services Development Council (FSDC) has proposed tax relief for business groups to retain city’s competitiveness
- Hong Kong lags behind other jurisdictions, including Singapore which launched group tax loss regime in 2003
Hong Kong’s government, owner of one of the world’s largest currency reserves, should consider amending its tax code to let companies transfer losses among units, so that it can maintain the financial centre’s competitiveness with regional rivals, an advisory body said.
The city can consider a group tax loss regime similar to the one enacted in Singapore in 2003, allowing businesses to claim tax losses from the previous year, according to a proposal yesterday (on Thursday) by the Financial Services Development Council (FSDC), which advises the government.
Group tax loss relief “has become increasingly relevant, given the current position in the economic cycle, especially considering the various social and economic factors faced by the city now,” FSDC’s board member Winnie Wong Chi-shun said at a media briefing. The proposed change “will be an important aspect of maintaining a friendly business environment in Hong Kong, and ensuring [the city’s] regional and global competitiveness as an international financial centre,” she said.
Hong Kong’s economy contracted for the fourth consecutive quarter in the three months ended June, as business activity and consumption were crimped by a combination of anti-government protests, a US-China trade war and the coronavirus pandemic. The economy shrank 9 per cent in the second quarter, forcing the local government to dig deep for ideas to stanch the slump, restore confidence and restart activity.
One such idea was the tax loss relief, enacted in Singapore and many other jurisdictions, which lowers the tax burden on companies, giving entrepreneurs the incentive to take risks with start-ups and new ventures, particularly during times of economic hardship.
“At the moment, a financial services group that operates several different companies in Hong Kong cannot offset the profit of one company against losses in other companies,” unlike in many other jurisdictions, said Darren Bowdern, KPMG’s Hong Kong tax partner, and a member of FSDC. The lack of such a feature “simply puts Hong Kong at a disadvantage as a choice jurisdiction for establishing [businesses]” he said.
The FSDC’s updated report proposes that only losses incurred by subsidiaries of a group since the year the new tax regime is enacted can be counted to set off taxable profits of its other companies. Groups can only claim back tax losses of the same company in the previous year, rather than by an unlimited amount of years as proposed in the 2017 report.
