Hong Kong lawmakers say 5-year tax incentive too short to entice major innovative firms

Hong Kong lawmakers have backed the government’s proposed tax incentives for large innovative companies, but many said on Monday that the planned five-year concession period is too short to attract major firms to establish headquarters or expand operations in the city.

Chief Executive John Lee Ka-chiu in his policy address last month said the government planned to submit a bill introducing preferential profits tax rates of either 5 per cent or 8.25 per cent, which was half of the city’s standard corporate tax rate of 16.5 per cent, for selected innovative enterprises for up to five years.

Secretary for Financial Services and the Treasury Christopher Hui Ching-yu told lawmakers at a meeting of the Legislative Council’s financial affairs panel that the incentives would be limited to specific sectors, including advanced manufacturing, finance, logistics and supply chain management, as well as to companies establishing headquarters in Hong Kong.

“The special tax rates [scheme] will set a high threshold, with only very large companies that have big expansion plans in Hong Kong and hire many people here qualifying,” Hui said.

He did not specify the qualifying thresholds, saying they would vary by industry.

While lawmakers said they supported the proposal, many questioned whether a five-year tax concession would be sufficient to influence investment decisions.

“Many innovative companies do not earn any money in the first 10 years of operation, so they would not need to pay tax anyway,” said lawmaker Alan Chan Chung-yee at the meeting. “The tax incentives would last for only five years and are not attractive to them. A prolonged period of 10 or 15 years may be more appropriate.”

Lawmaker Nick Chan Hiu-fung said overseas companies considering relocating their regional headquarters would likely take a longer-term view.

“The chief financial officers of many of the largest international technology companies look at the long term,” Chan said. “If the tax reduction only lasts for five years, it is hard to convince their board of directors to move their headquarters here.”

Hui said five years should be sufficient, pointing out that Singapore offered similar tax incentives that also lasted for five years.

“Companies can apply to renew the five-year period if they continue to expand in Hong Kong for another five years,” Hui said. “Tax incentives are only one of the reasons for companies to come to Hong Kong, as they also eye business opportunities here.”

Several lawmakers also raised concerns that the scheme could be abused.

Hui said the proposal would differ from other industry-specific tax incentives that were granted automatically once a company reached a certain threshold. Instead, each application would require approval from a committee led by Financial Secretary Paul Chan Mo-po.

“The approval process would prevent tax avoidance, and companies would need to report to the government on whether they have implemented their expansion and hiring plans,” Hui said.

In an interview with the South China Morning Post last month, Chan said a handful of leading firms from emerging industries were expected to come to Hong Kong in the coming months, with the incentive scheme expected to take effect from the tax year starting on April 1, subject to legislative approval.

The panel also discussed whether Hong Kong should extend stock market trading hours to keep pace with other exchanges that have extended or plan to extend their trading hours, including Nasdaq, London and South Korea.

Hui said any such move would require careful study.

“We would need to have a detailed exploration of the proposed trading hours and whether such a move can really bring benefits to the market, as a longer trading time may only spread turnover over a longer period,” Hui said.