Hong Kong plans to introduce GST

[skylee]

As in the title. The proposal is to levy 5% GST on almost all goods and services so as to broaden the tax base. There will be tax refund for tourists and assistance for low-income people. Salaries and profit taxes will be lowered.

The problem is that only a small proportion of HK people are required to pay salaries tax, which is a major source of government revenue, and the current proposal affect the vested interest of the majority of the people who don't need to pay any tax.

Although the tax I have to pay might be reduced with the GST, I can't help but feel that it is a stupid idea which will affect the HK economy as a whole and ruin the beauty of our simple taxation system.

I have heard that the proposal was also criticised in the editorial of both the Wall Street Journal and Financial Times. Would appreciate it if anyone could find me the links to read them.

And any views?

[Long Zhiren]

I found three articles on WSJ. WSJ is really not public access. You need a subscription to read the articles. I wonder if this cut and paste then qualifies for piracy?

Hong Kong May Exempt

Tax on Financial Services

By AMY OR

July 19, 2006

HONG KONG -- The government plans to exempt financial services from a proposed goods-and-services tax, according to a consultation paper unveiled by the Hong Kong government yesterday.

Financial services -- such as mortgages, insurance, money exchange, trading of securities and underwriting -- would be "zero rated," representing a first for a major financial center, the government said in the paper, on which a nine-month consultation period began yesterday.

"This approach would make Hong Kong a pioneer insofar as no major financial center in the world has yet moved to a full zero rating of its financial supplies, although the international trend is moving in that direction," it said. "Financial services are widely acknowledged as a very difficult area to tax under [the] GST."

The consultation paper comes after a goods-and-services tax has been mooted by the government for several years as a way to widen Hong Kong's narrow tax base and add stability to the government revenue stream. However, it would be several years before the proposed sales tax would be implemented.

Speaking at a Legislative Council financial-services panel meeting yesterday, Financial Secretary Henry Tang said the government has no preference over whether to introduce such a tax or what level it should be. But he said a 5% sales tax would generate 30 billion Hong Kong dollars (US$3.86 billion) for public coffers.

"We understand that this topic's extremely controversial. But as a forward-looking, responsible government, we shouldn't and won't ignore the issue, just because it will have a great impact on the future developments of Hong Kong. That's irresponsible," Mr. Tang said.

He stressed the measure, if introduced, would be "revenue neutral," aimed at broadening Hong Kong's tax base and not at raising more income for the administration.

Under one scenario, the paper suggested a 5% sales tax could mean up to a five-percentage-point reduction in profits tax.

In his budget for the fiscal year ending March, Mr. Tang said the local administration's revenue was unstable and subject to economic fluctuations.

Mr. Tang said yesterday that now is an "opportune time to start the discussion" of a sales tax.

Write to Amy Or at amy.or@dowjones.com

Tax-and-Spend Hong Kong

July 19, 2006

What does a government that recently announced its biggest budget surplus in years do? In Hong Kong's case, the answer is to unveil a blueprint for a new sales tax.

Hong Kong's prosperity since World War II is sometimes referred to as a "miracle." But much of the city's success is built on its low and simple tax regime. That's one of the main reasons Hong Kong has ranked at the top of the Heritage Foundation-Wall Street Journal annual Index of Economic Freedom ever since it began in 1995.

Hong Kong's maximum tax rates of 16% for individuals and 17.5% for business provide great incentives to invest and take risks. And with no complex deductions or exemptions, the tax system is transparent and user-friendly; even the mathematically challenged can fill out their tax forms in just a few minutes.

Then there's Hong Kong's world-wide reputation as a shopper's paradise. The introduction of a sales tax would jeopardize that status as well as introduce a huge new tax-collection bureaucracy as the government extracted its due across town.

In a paper released yesterday, the Hong Kong government says a 5% sales tax is only a proposal and that it hasn't made up its mind. Even if the new levy is introduced, it says, it will be offset by cuts in other taxes.

But forgive us for feeling skeptical when a government says it's not in it for the money. The consultation paper concedes that the revenue-neutral pledge is good for only five years and could be waived altogether if the legislature prefers to spend the money on public services instead. If experience elsewhere in the world is any guide, it won't be long before the government finds an excuse to increase the levy from its initial 5%.

"Hong Kong needs a broader tax base to provide a more stable and robust source of revenue," Financial Secretary Henry Tang said yesterday. The government says it needs to broaden the tax base because it is heavily dependent on revenue from the city's volatile property market.

But it strikes us that a system that has just delivered a HK$14 billion ($1.8 billion) surplus for 2005-06 is in no need of fixing. Instead of talking about new taxes, Hong Kong could be returning this surplus to its citizens. And if it's worried about running short the next time the local property market takes a nose dive, a better option would be to take a hard look at soaring spending. The city now spends HK$33.8 billion a year on social welfare, almost double the figure a decade ago.

Even as it was unveiled yesterday, the proposed sales tax took on the appearance of a nonstarter. Legislators from all major political parties announced they would never support the legislation needed to implement it. And the government insisted there was no question of doing anything for several years to come.

But even if the proposal dies a deserved death, the fact that it was put forward offers good cause to question whether the city's unelected leaders understand what it takes to keep Hong Kong as the world's freest economy.

Hong Kong Weighs a Tax Cut

City Could Trim Levy

On Corporate Profits

With New Sales Duty

By AMY OR

July 18, 2006

HONG KONG -- The Hong Kong government is considering slashing the city's already low corporate-profits-tax rate if a proposed goods-and-services tax is introduced, according to a government consultation paper.

A cut in tax rate on corporate profits to 12.5% from 17.5% is one of the scenarios outlined by the government in the paper issued to the Legislative Council over the weekend ahead of a nine-month consultation on introducing the new tax.

The government has been considering a goods-and-service tax for several years as a way to widen Hong Kong's narrow tax base and add stability to its revenue stream. However, it would be several years before the proposed new tax -- put at 5% in an example in the government paper -- would be implemented.

Three years ago, Hong Kong raised the tax rate on profits by 1.5 percentage points from 16% in a bid to raise revenue and trim its budget deficit, making it the only region in the world to raise profits tax in the past five years, the government said in the paper. However, Hong Kong still has one of the lowest profits-tax levels in the world. Only a few places -- such as Macau with a 12% rate and Cyprus at 10% -- have a lower rate.

Regional competitor Singapore, meanwhile, has cut its corporate-income-tax rate repeatedly since 1986 to its current level of 20%, half its rate of 20 years ago.

"Even though Hong Kong charges a lower headline profits tax, the Singapore government provides subsidies and exemptions to firms, making its effective tax rate more attractive," said the Hong Kong General Chamber of Commerce's chief economist, David O'Rear.

The Hong Kong government document said direct tax rates could be lowered as a result of the introduction of a "low level" sales tax. Using a 5% goods-and-services tax as an example, it said the new tax would garner an additional 30 billion Hong Kong dollars, or nearly US$4 billion, in government revenue.

Under that scenario, the paper said a five-percentage-point cut in profits tax was possible, even after handing out financial aid to low-income families.

The government has long considered a sales tax. In his budget for the 2006-07 fiscal year, Financial Secretary Henry Tang said the local administration's revenue was unstable and subject to economic fluctuations, with money from land sales swinging between 3% and 28% of government revenue over the past decade. Also, a little more than one-third of the city's working population of 3.4 million now pays salaries tax, with contributions from the top 100 taxpayers amounting to 60% of all salaries tax collected.

Mr. Tang said now is an "opportune time to start the discussion" of a sales tax as the local economy shows robust growth, inflation is mild and the unemployment rate is falling.

But Mr. O'Rear said the timing is "very unfortunate," as the election for Hong Kong's leader, the chief executive, is scheduled to occur next year and Legislative Council elections take place in 2008, meaning the proposed sales tax may take at least three to five years to implement.

Write to Amy Or at amy.or@dowjones.com

[gato]

Reducing the corporate income tax and salary tax for high-income earners, while creating a sales tax, is clearly a shifting of tax burden on the less well-to-do. If Hong Kong were a democracy, I would think this plan would have little chance of passing because, as skylee says, more people would be hurt by this than would be helped, at least in the short run. Maybe in the long run, more businesses and higher income earners would be attracted to HK and boost the local economy in the process, but in the short run, it's just a simple redistribution of the tax burden.

If all the government wanted was to stablize its revenue stream, it can consider other options, like floating bonds in lean years and paying them off with the excess revenue from the flush years.

[melas]

Reducing the corporate income tax and salary tax for high-income earners, while creating a sales tax, is clearly a shifting of tax burden on the less well-to-do. If Hong Kong were a democracy, I would think this plan would have little chance of passing because, as skylee says, more people would be hurt by this than would be helped, at least in the short run.

Although there's no universal suffrage in hong kong, the bill will be extremely of little chance to go. Up to this moment, not even a pro-government parties there dare to say they support the bill. The hong kong financial secretary was also frightened to explain the details. The whole bill, after huge spending of efforts on that, is currently repackaged as a 'civil education' by the government to let people know hong kong tax base is so narrow only.

GST is basically controversial everywhere. In Canada, though having democracy, this most-hatred bill was pushed and passed by almost-forgotten PC party.

[anthony_barker]

The problem is that HK taxes were mostly based around property - and selling rights to land (I believe almost everything is sold as 99 year leases).

After joining Mainland prices have been in a tailspin. Why locate in HK when you can be just across the border in Shenzhen (which is much cheaper) ?

This has significantly impacted the tax base - thus the need for a GST.

From what I understand most weathy HKers pay 0% tax anyway - they take their money out as dividends which are non taxable or hide it offshore.

[skylee]

Why locate in HK when you can be just across the border in Shenzhen (which is much cheaper) ?

For the better legal/financial systems, perhaps?

[Shadowdh]

Gato... there is precedence for gst being foisted upon a angered public even in a democracy... NZ and I believe Aust are two such places... NZ has risen the gst rate at least twice that I know of... bloody govts...

[gato]

Yes, bloody...

[Long Zhiren]

If Hong Kong were a democracy, I would think this plan would have little chance of passing because, as skylee says, more people would be hurt by this than would be helped

Here's a philosophical question based on this remark.

Isn't it somewhat aside from the interests of a democracy to have a majority voting to put burdens on a minority?

If, for example, the rich people are to be taxed heavier, shouldn't that be decided by the rich people instead of by the people who aren't affected by such an initiative? Do you see the philosophical issue at hand here? It's essentially thievery the other way around.

[gato]

That's how taxation works in a democracy. Indeed it's how other laws are passed, as well. There's collective consent instead of individual consent. Perhaps you think it's thievery because thievery to you is "taking of one's property without one's consent." But most people don't think of taxes as thievery just because they didn't consent to the tax individually.

[bhchao]

Substantially reducing the salary tax for the wealthy when it comprises a large portion of government revenues, is a recipe for fiscal deficits; unless you compensate the shortfall by decreasing spending on domestic programs.

I see this GST as an unwise idea because whatever revenues the government gets from the GST is nowhere comparable to the large chunk of revenue it receives from the salary tax. It would decrease the tax coffers for the government while creating financial inconvenience for the less well-to-do.

It's like taking a record surplus and turning it into a record deficit by using the surplus to finance tax cuts that benefit mostly the wealthy, with little tax savings for the middle class and those living on the poverty line.

Taxation should be implemented on a progressive formula rather than a regressive one. This GST would be regressive since it takes a larger percentage out of the less well-to-do's disposable income, while taking a much smaller percentage out of the affluent individual's disposable income.

New York City today reported a record surplus. The boost in revenue resulted from surging Wall Street profits and bonuses combined with rising property values. http://www.bloomberg.com/apps/news?pid=20601103&sid=agRwGwlM7fB4&refer=us

[Long Zhiren]

Substantially reducing the salary tax for the wealthy when it comprises a large portion of government revenues, is a recipe for fiscal deficits; unless you compensate the shortfall by decreasing spending on domestic programs.

...or unless you compensate the shortfall with more meaningful taxation.

IMO, I prefer Steve Forbes' flat tax idea.

I also think "use" taxes make much more sense than certain other taxes like "property taxes." For example, I like the European idea of adding about $1 of tax per liter of gasoline sold. That should cover education, transportation, enivronment, health and a good fraction of national defense. [it makes those with more impact, pay more, not the other way around... allowing those with fixed incomes and lower impact lifestyles to have less tax burden.] Property tax seems fine with me when it covers more basic civil infrastructure. The association of property tax with school infrastructure seems to cause chaos--the rich get richer and the poor get poorer. Rising property taxes have also had the cruel effect of making elderly people lose their homes.

I do not like the idea of meaningless subsidies. The rich should not be required to pay for the poor because somebody thinks it is moral to rob from the rich. That was Mao's first agenda. Robbery is never moral.

If the driver of an SUV is harming the environment and health of some elderly person, that driver should be taxed accordingly. If you subsidize the detriment of something, you need to also subsidize the repair of that same thing. The you-break-it-you-fix-it rule instead of the you-break-it-you-make-sombody-else-pay-for-it rule.

Finally, Lotto & Casinos = taxation on those who don't understand statistical odds. It's too bad their proceeds rarely go to where the voters were told. They should be shut down if they're not fulfilling their original justifications. They're also making a lot of people waste their hard earned money instead of saving & investing properly.

Enough of my soapbox... Me for 2008!

[ZHONGGUOREN]

hmm personally i do not like this tax. it is far too regressive for my liking. i work as a taxi driver and i often drive tourists around, a lot of them say enjoy coming to hong kong because hk = shoppers paridise = no gst tax. i think henry tang has underestimated the possible consequences which would arise if the tax were to be implemented. yes it would widen the tax base in hong kong and bring in less volatile revenue, but i believe the negative effects would overweigh the potentially positive effects. also, since this tax is not aimed at increasing goverment revenue...which is kinda stupid for a tax..cant TAng think other ways to stabalise his revenue, instead of making my life harder!! he has to understand there are still many low income earners in hong kong like me who would be devastated by this terribly regressive tax. hai i think tang should step down, hes only introducing it cuz hes rich and he wont be affected much himself. he is too selfish!

[bhchao]

Flat tax may give the impression of fairness by taxing everyone at the same rate. But then the issue of fairness would arise again because even though everyone is taxed at the same rate, poorer people would pay more taxes under a flat tax system than they would under a progressive system. On the other hand, wealthier individuals would pay fewer taxes than they would under a progressive system.

In order for a government with a flat tax system to achieve the same amount of revenue as in a progressive tax system, the less well-to-do (especially those on the very low end) would have to bear a significantly higher tax burden, while the top income earners bear a significantly lower tax burden.

Let's say the flat tax is 19%. For a $10,000 a year household in which every penny counts, imposing a 19% tax on $100 is a heavy burden to them; while 19% of $100 for a very affluent household means nothing,

BTW, New York City no longer has sales tax for clothing, and footwear over $110. Previously the city sales tax was 4% while the state sales tax was 4.375%, for a total sales tax of 8.375%. The city and state sales tax on apparel were permanently eliminated last year and early 2006. So now there is 0% sales tax on apparel. But you can forget it if you plan on buying Ferragamo shoes.

When the sales tax was a combined 8.375%, many shoppers shopped in New Jersey and outside of NYC where there is no sales tax. Not sure if HKers would be able to have shopping alternatives elsewhere (like outside of HK) once the sales tax is imposed.

[gato]

It's about how much each person should contribute to pay for public goods like schools, roads, and helping the weak (which government spending should be about). These public goods help everyone, and it can be argued that rich have more to gain from these public goods than the poor because social stability is good for business and therefore should pay more. I'm not sure if there is anything inherently more fair about a flat tax because even under a flat rate system, the rich have to pay more -- a flat percentage of a larger income is still larger. So the advocates of progressive taxation are simply arguing that the rich should pay even more, and if they have the ability to and it doesn't signficantly detract from the incentive to work (two big if's, especially the latter), then I think it's just as valid a way of sharing the social responsibility as the flat tax system.

[skylee]

When the sales tax was a combined 8.375%, many shoppers shopped in New Jersey and outside of NYC where there is no sales tax. Not sure if HKers would be able to have shopping alternatives elsewhere (like outside of HK) once the sales tax is imposed.

Yes Shenzhen.

I welcome the idea of other people sharing my tax burden (as would happen with the GST). But IMHO GST is just not the right kind of tax for HK.

Any idea on what other tax/duty we could have? No good raising salaries, profits and property taxes ... already very heavy tax on petroleum, alcohol, tabacco ... I like the idea of having a departure tax at Lowu ...

[gato]

Property taxes generally is a way for government to raise revenue that's less affected by the ups and downs of the economy. It's more stable than a wage tax or a capital gains tax.

[melas]

The problem is that HK taxes were mostly based around property - and selling rights to land (I believe almost everything is sold as 99 year leases).

After joining Mainland prices have been in a tailspin. Why locate in HK when you can be just across the border in Shenzhen (which is much cheaper) ?

This has significantly impacted the tax base - thus the need for a GST.

From what I understand most weathy HKers pay 0% tax anyway - they take their money out as dividends which are non taxable or hide it offshore.

The most practical reason to stay in hong kong to do business is tax. While Shenzhen's business law system, especially contract law, has become more mature, their tax is significantly heavier than hong kong. In fact, the flourish of hong kong's retail shops in recent years is just a result of zero sales tax. Why would a mainlander pay a thousand to buy an air ticket to hong kong and buy digital camera and jewelery? Tax really matters.

When the hong kong gov't proposed GST, they just neglect that Macao, a free port, is an hour away from Hong Kong only. There's no much difference for a shpping travelers to go to Hong kong or Macau.

Tax contributed by the wealthiest is actually huge too. While they may pay little income tax, they contribute the most of profit tax.

The problem about narrow tax base apparently makes sense, but unfortunately no countries can solve fiscal depicit by introducing sales tax. It only helps at encouraging gov't to waste more money. Take education as an example. While Hong Kong faced a little and short-term depicit in the past few years, the spending on education has increased by 20 billion, while the number of students are actually decreasing. Then where the money goes ? It goes to a notorious program called Associate Degree.

[Ian_Lee]

GST will be only liked by accountants and government bureaucrats.

If GST is passed, everytime you come back from your 5-day trip in Tokyo, you will be taxed for the merchandise that you buy there over HK$5,000! Why should those pitiful OLs be deprived of such shopping joy?

And why should the tax base be broadened in the first place? Why should the lower middle class pay proportionally as much as the well-off do?

In fact, GST is a "lazy" tax that those government bureaucrats do not need to think of more creative ways to balance the budget (but in reality HK budget is most of the time in surplus).

There are many ways to increase revenue:

(1) Reduce spending:

HK government has lots of ways to reduce spending if it really wishes, i.e. The Monetary Authority does not need to occupy several floors in IFC.

(2) Increase stamp duty rate for stock transaction:

Even though Donald Tsang argued that the bourses worldwide have gradually abolished stamp duty for stock transaction when he was the Financial Secretary, he has never proved that it has any relationship to the transaction volume in the stock market.

(3) Impose deadline on welfare recipients:

In US, welfare recipients can only receive welfare for a maximum of 5 years. But in HK, there is no such time limit.

[889]

HK government has lots of ways to reduce spending if it really wishes . . . .

Don't forget the Overseas Education Allowance under which over 12,000 HK civil servants can send their children to boarding school in the UK at taxpayer expense.