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Following is a speech by the Secretary for the Treasury, Miss Denise Yue, in attending the Society of Chinese Accountants and Auditors 85th Annual Dinner tonight (Thursday):
Mr President, Ladies and Gentlemen,
Thank you very much for inviting me to attend tonight's celebration of the 85th Anniversary of your Society. I wish to offer my sincere congratulations to the Society for its long and impressive record of service to Hong Kong. Eighty-five years is not a short period of time by any account, and an institution of this vintage which is going from strength to strength is an asset which Hong Kong is proud to hold up and treasure. As Secretary for the Treasury, I look forward to working with the Society and with all of you for the continued prosperity of Hong Kong.
For Hong Kong, enterprise is the key to prosperity. It is enterprise that provides employment and creates wealth in the community. And for enterprise to flourish, there is nothing more important than a truly "business friendly" government. Your Government not only recognise this, but are in the process of internalising it into the civil service culture. We have, for example, pledged to be more user friendly, to be more efficient, and to respond to changing business needs. We have pressed ahead with actions that turn these promises into reality in record time.
A good example is our tax regime. I choose this deliberately because taxation touches the heart and soul of every business activity. The "right" tax regime is the most powerful incentive for enterprise while the "wrong" one is the most destructive.
Over the last fifty years or so, the Government has carried out three large-scale reviews of the taxation system, each taking several years to complete. But this is not good enough for a truly business friendly government. So let us look at what happened last year. The Financial Secretary announced in his 1997-98 Budget Speech, in March 1997, his intention to conduct a comprehensive review on the profits tax system, with a view to improving upon it so as to attract more business to Hong Kong and to help our local business become more competitive. We issued a consultative document last July. We studied every one of the 74 submissions received, including yours. We drew up our recommendations which were announced by the Financial Secretary in February this year, in his 1998-99 Budget Speech. We completed all the associated legislative work last month. Altogether, the bulk of work took less than nine months from start to finish.
Let me briefly recap the implementation of the more significant changes:
* the profits tax for corporations for the assessment year commencing 1 April 1998 and the provisional tax for 1998-99 has been adjusted downwards from 16.5 to 16 per cent;
* write-off for new expenditure on plant and equipment related specifically to manufacturing and on computer hardware, software and systems development has been increased to 100 per cent so as to encourage firms to invest in such items so as to enhance their efficiency and productivity. Written-down value for these items which are already owned can be written off immediately in the 1998-99 year of assessment. The Inland Revenue Department is now revising the practice note on depreciation allowances for plant and machinery to reflect these measures;
* the annual depreciation allowance for commercial buildings has been increased from 2 to 4 per cent to provide some incentives for business operation;
* the 20 per cent deduction for capital expenditure on refurbishment has been extended from hotels to all industrial and commercial buildings so as to allow all businesses to completely write off their capital expenditure on refurbishment against tax over a period of five years;
* the scope of "scientific research" under section 16B of the Inland Revenue Ordinance has been extended to include market research, feasibility studies and other research activities related to business and management sciences, in order to stimulate businesses to find ways to add higher value and to achieve higher productivity.
The profits tax review also covered the subject of double taxation arrangements. Last month, we amended section 23B of the Inland Revenue Ordinance to exempt income which is derived from Hong Kong by foreign ship operators if the foreign ship operator's country of residence grants an equivalent exemption to Hong Kong ship operators. We are in the process of finalising a model text for reciprocal tax exemption of shipping income. We hope to enter into negotiations of double taxation relief arrangements on shipping with countries which are the main cargo sources for Hong Kong ship operators in the months ahead and which do not have reciprocal exemption provisions in their tax laws. Through these measures, our ship operators will be able to compete on level terms in the international shipping arena.
Due to the international nature of aircraft operations, airline operators are more susceptible to double taxation than other taxpayers. It is our policy to include double taxation relief arrangements for airline income in the bilateral air services agreements negotiated with our aviation partners. So far we have made such arrangements with eight countries. We will continue our policy to negotiate similar arrangements with other places in future.
Recognising the uncertainties faced by Hong Kong businesses in respect of the tax position of their income arising in the Mainland, we have reached an understanding with the relevant authorities in the Central People's Government on arrangements aimed at minimising the scope for double taxation between the Mainland and Hong Kong. The arrangements cover airline and shipping operations as well as other business areas. These will enhance the competitiveness of Hong Kong businesses operating on the Mainland. The Inland Revenue Department is preparing a practice note to detail the arrangements and hopes to issue it by the end of next month.
As for similar double taxation arrangements with other countries, we accept that these can bring economic benefits to Hong Kong in certain circumstances. However, we are also mindful about the potential revenue loss in making such agreements and the demands for exchange of information between tax authorities of the agreement parties which may be in conflict with the secrecy provisions under our tax legislation. As a first step, we are in the process of identifying a number of countries for negotiation of such agreements where we believe doing so would be in Hong Kong's overall interest.
To enhance certainty in the operation of our territorial source principle of taxation, the Inland Revenue Department has begun to provide, on a full-cost recovery basis, an advance ruling service for the business community on source of profits since 1 April 1998. Businesses are able to learn in advance whether or not the profits to be derived from a proposed venture would be subject to Hong Kong profits tax.
So last year's review of our profits tax regime is a good illustration of the efforts made by your Government to make Hong Kong a better place for business. But there is more. I hope the profits tax review also demonstrates that your Government do look forward, that we do try to make things better rather than accept the status quo, that we are responsive to views expressed, that we mean what we say, and that we do work hard to deliver on the promises that we make to the community.
Before I sit down and allow all of you to enjoy tonight's feast and entertainment, I want to draw your attention to what will happen in 10 days' time, namely the first Legislative Council election of the Hong Kong Special Administrative Region to be held on 24 May. I urge all of you, who are registered voters, to exercise your right on that day to vote in your geographical constituency as well as the accountancy functional constituency. Your choice of the candidates to represent your profession as well as your district will be of great significance. Your votes help realise the concept of "Hong Kong people ruling Hong Kong". Remember to allow time to cast your important votes on Sunday, the 24th of May.
Thank you for your kind attention.
End/Thursday, May 14, 1998
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