PwC: Hong Kong Needs to Broaden Tax Measures

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PwC said today that Hong Kong can introduce a tax policy to promote a diversified economy and a forward-looking approach that balances skilled labor and expand employment in hi-tech industries.

“The four pillar industries contributed close to half of Hong Kong’s GDP and employment in the past ten years, pointed out PwC, said Jeremy Choi, PwC Hong Kong Tax Partner. “It’s time for the government to conduct a comprehensive review of the current tax system and evaluate the effectiveness of past tax incentives. Achieving broader tax incentives across industries allows businesses to plan a future of mobilizing talent and technologies to drive innovation, and reduce Hong Kong’s exposure to macroeconomic risks.”

The government introduced a super tax deduction scheme last year’s Policy Address: a 300% tax deduction to be offered for the first HK$2 million of eligible R&D expenditure incurred by enterprises; a subsequent 200% tax deduction applies to remaining expenditure.

PwC recommends the government is to extend the super deduction on R&D activities to cover subcontracting R&D arrangements in the Greater Bay Area (GBA).

Other measures include refundable credits of R&D expenditure to benefit small and medium enterprises and start-ups, PwC added.

In addition, PwC said the government needs introduce unilateral foreign tax credits to avoid potential double tax on royalty income received by Hong Kong Intellectual Property (IP) companies from non-treaty jurisdictions.

“These measures will strengthen Hong Kong’s position as an IP hub within the region,” Choi noted. “The government should also consider introducing a reduced profits tax rate of 8.25% for IP companies setting up their research and development base in Hong Kong.”.

The big four accounting firm also recommends the government to roll out tax measures to strengthen Hong Kong’s leading role as a major port in Southern China, within the global maritime and ship financing industry.

“When reviewing maritime legislations, we urge the government to encourage the growth of maritime and ship leasing management, and maritime and shipping-related support and management services, without jeopardizing the current tax position of shipping operators in Hong Kong,” said Agnes Wong, PwC Hong Kong Tax Partner.

To promote innovate and technological development, Hong Kong also needs to facilitate the flow of people, goods and capital into the GBA, PwC pointed out.

Tax measures include reducing Mainland corporate tax rate from 25% to 16.5% for Hong Kong companies with business in the Greater Bay Area, the firm said.

For Hong Kong residents who work and live in Mainland China, they should be subject to a reduced Individual Income Tax (IIT) of not more than 15%, or offered an IIT tax rebate/exemption if certain criteria are fulfilled, PwC added.

“To develop GBA into a world-class technology hub, tax and employment incentives are key drivers to attract and nurture talent, technology companies and diversify growth of industries,” Wong said. The long-term benefit to Hong Kong businesses is closer economic integration and collaboration with Mainland China.”

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