EY’s comments on the new taxation proposal

Hong Kong, 11 October 2017

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EY welcomes the new tax initiatives proposed by the Chief Executive today. In fact, EY has advocated these proposals for a number of years.

Two-tier profits tax system

EY welcomes the proposal to lower the profits tax rate of an enterprise for its first HK$2 million of profits to 8.25%, a rate which is lower than the 10% rate which was originally proposed in the Chief Executive’s election manifesto. Small and Medium Enterprises (SMEs) are the backbone of Hong Kong’s economy, providing nearly half of all employment opportunities in Hong Kong. Given that many neighboring jurisdictions are offering comparatively lower rates of tax for SMEs to foster their development and hence their competitiveness, this proposal will benefit start-ups and SMEs the most. It is estimated that the 95,000 or so SMEs which earned profits of HK$2 million or less in the past will benefit most from the proposal.

Enhanced tax deductions for research and development expenditures

Compared to neighboring jurisdictions, Hong Kong’s research and development (R&D) expenditures as a percentage of gross domestic products (GDP) are not only lower, but a greater portion of them are incurred by public institutions. This is in contrast to other economies, where a greater portion of their R&D expenditures are typically incurred by the private sector. As is often the case, R&D activities undertaken by the private sector may be more responsive to market needs and demands. As such, EY fully supports the proposal to provide enhanced tax deductions for R&D expenditures, so as to encourage the private sector to increase its investment in R&D. EY believes that this proposal will help attain the Government’s stated goal of doubling R&D expenditures in Hong Kong from the current 0.73% to 1.5% of the GDP of Hong Kong.

EY is looking forward to the implementation of these two new tax proposals. While addressing any concern for possible tax abuse, it is to be hoped that the administration will not include too many restrictive qualifying conditions in the legislation. Otherwise, this might complicate the tax system of Hong Kong and render some legitimate cases unable to take advantage of these two new tax proposals.

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Notes to Editors

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This response has been issued by Ernst & Young, China, a part of the Ernst & Young global organization.