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Transcript of FS'Q & A Session


Following is the transcript(English only)of a question and answer session given by the Financial Secretary, Mr Henry Tang, following his speech at the Joint Business Community Luncheon on the 2004-05 Budget at the Hong Kong Convention and Exhibition Centre today (March 15):

Question (Dr W.K.Lo - Federation of Hong Kong Industries): Henry, I am very impressed with your Budget Report and in particular the paragraphs about fostering creativity and innovation, moving towards high value-added industries. And you particularly point out that there will be some plan to extend the tax-deductions for research and R & D expenses to cover design related activities. However, other than some accelerated depreciation on capital spending relating to R & D or leasehold improvement, I am not aware of any specific tax deduction for R & D expenses. I really mean expenses. So, reading between the lines, are you really thinking of initiating some plans for tax-deductions on design and R & D, which are not specifically spelt out yet in your report?

FS: Thank you very much. I thought I am amongst friends in the business group, and he asks the most difficult question to begin with. In formulating this budget, one of the principles at the top of Government is: How can we keep our taxation system simple, low, but also sustainable? So, there is a good reason for me not to introduce any tax incentives that might distort the market or the behaviour of companies. That is not to say I will never do that. But in our case, research and development, in the past, has never included design activities. There has always been scientific research and development, but not including design activities. I feel that by broadening the definition of R & D, it will allow companies to deduct the expenses they have spent on design so that they will enjoy the tax benefit as well.

Arguably, you could say I can deduct the expense today under some other categories, whether it is just a normal business expense or anything else. But actually, while you may be doing it today, it may not be entirely acceptable to our tax authorities. So if anyone has been deducting certain design-related expenses in their account and the Inland Revenue Department has actually started looking at them, it is not to persecute you for your past deeds. But in order to avoid any of that happening in the future, we decided to make it clear.

But (the Government's support to) design is not just in the form of a tax incentive. I plan to set up a $250 million fund to launch a Design Smart initiative because we want to give design-related, the creative industries, a helping hand in getting a new market share. So it is a combined effort, it is not one of these one-off kind of considerations.

Question (C P Chu - InterCham): First of all, I would like to polish your shoes by saying that you do have a very well balanced and very much welcome maiden budget. And my question is, now that we are talking about building a bridge between Hong Kong, Macao and Zhuhai - definitely a very good proposal but it might take several years before something will happen, it might take eight or nine years before the bridge will be completed - would you think that because the MTR is being built on the Shenzhen Border and also the Hong Kong MTR or KCR, they also have a station somewhere near the border, could you consider that you just let our KCR or MTR go direct through to Shenzhen Border and vice versa? And then with the customs clearance right in the Kowloon Station and vice versa in Shenzhen, I think that would improve a lot of traffic and also it is very, very good infrastructure to support CEPA and other "tsat yat yau" (Seven-Day Travel) something like that, okay. You cannot give me an answer immediately, I understand, but I hope if you cannot give me an answer right now, you will give my proposal your very serious consideration.

FS: Thank you very much. If you ask me from my background as a businessman, I would say: What is to prevent someone from getting on a train in Central after work and an hour or an hour-and-a-half later end up in his two-car garage backyard home in Dongguan and doing the customs procedures on the train itself? Because in many western countries where many of you are from, an hour-and-a-half door-to-door commute is quite normal. In fact, many people who live in Westchester County or the Greater New York area, Connecticut, normally commute one-and-a-half hours to work in Manhattan. So looking even further beyond, I would imagine that if there are potentials for us to enhance our rail network so that, first, it will encourage people to take more public transport for environmental concerns, but also at the same time encourage a greater integration in the way of life between Hong Kong and the Mainland so that we can offer our people a higher standard of living for not necessarily more money to the company. So these are some of the things that looking beyond we need to think about.

But at this point in time, I feel that we are not yet at the stage where we are able to send our trains across the border so that they will continue on to other parts in the Mainland. But on the other hand, much of our rail network is already designed so that it will closely integrate with the network across the boundary. For example, the New Western Crossing, together with the extension of the KCRC, people will just have to get off the train at that station, walk across that bridge, and then get on to the Shenzhen Underground, the Shenzhen MTR. So this is a step towards the integration of the rail network to facilitate people going back and forth, which is very much fundamental to our future economic growth - how we can facilitate the integration of this economic relationship so that we will have a mutually beneficial and multi-party winning formula - and these will be the ways that we are looking at. But presently, there are still limitations as to how far we go and I think we should take it one step at a time.

Question (Dr Michael Leung): I appreciate your speech but I find something that I might ask you. It seems that you mentioned today in your speech that you would like to see the market lead and the government to facilitate. It seems to me that you want the government - I mean the market to be the leading part and then the government will facilitate. It seems that you take a wait-and-see trajectory. And besides, you mentioned many times that you are going for the international businessmen that we have in the past, today and in the future. But I want to speak for the local businessmen. A lot of local businessmen, especially among the middle or the lower groups, they have been very keen and very impatient to wait for the government to take a leading role. Although you have mentioned any innovation or motivation to help them there. Well, what I suggest today is that you can make a proper and fast-channel - a channel that is two-way - that their plan or hope can come to you very fast and you can make them feel better and help them as soon as possible.

Now, as to the points or the base of tax, it seems that you still have taken the wait and see theory. Now, in fact there is a proverb saying that 'money begets money'. I think that business - lower business group especially - they do not have the capital. They need money. Now, what I think is, if you can create bonds as soon as possible and put up the infrastructure as you mentioned, so as to boost up the business and especially the local - not the international because the international businessmen already have a lot of money - now then you can use this money. Well, as I say, 'money begets money; if they have money to create jobs and business, I think the Hong Kong economy will revive very fast.

Now, I don't know whether you have been in Hong Kong during the years of 1950 or something. A lot of people migrated from China. They don't have money, they have to borrow money from the bank and they create jobs like the very big businessmen nowadays. They have started from nothing. I appreciate that you have the courage not to increase tax and you like to return the wealth to the people. I propose these two points. Yesterday, you may still have hesitated to build up the tax base, like the bonds. But today, I think I am not the only one that will support you - even that's China. That is all I want to say. Thank you.

FS: Let me first say, thank you very much for your support. Regarding the two issues that you have raised, I am very proud of one of the achievements I have made during the CEPA negotiations, and that achievement was that while we were negotiating with the Central People's Government, one of the key positions that I insisted upon - and they understood well why I insisted on that position - was that there should be fair competition for Hong Kong. Meaning, when we define a Hong Kong company, it does not have to be that it is somebody of my skin colour, but it should be someone who has made a commitment to Hong Kong, who has a history here and who has contributed to our economy in ways that are defined under the CEPA Agreement. So therefore it is colour-blind, racially-blind, and we do not really mind what colour the money that comes in - as long as it is not black. And we have successfully discussed with them, and they fully support our position, that we should have fair and open competition in Hong Kong, and may the best company make the most money the fastest.

As far as the market leads and government facilitates, I suppose you can say that maybe we should say government facilitates and let the market leads. Because sometimes we are never sure whether it is the cart before the horse or the horse before the cart. For example, with CEPA. CEPA is a platform; it is a platform that offers opportunities. But unless the government actually initiates something like this and successfully discusses with the Central People's Government for such a platform, it is really that we have to do that facilitation first, before the market can then realise its potential. So I do know that sometimes it may not be market-led but government-facilitated together, or government-facilitated and market-leads afterwards. But it is really very much, I hope, that it will be a hand-in-hand kind of arrangement where it is mutually beneficial and all parties win.

Question (Michael Kurtz - BearStearns): Two questions for you, both of them brief. With respect to the Goods and Services Tax - and I do not mean to ask you to front-run the study that will be completed later this year - but my two questions are, first of all, in your budget presentation you did mention, at least within a hypothetical context, a five per cent Goods and Services Tax. I am wondering, are you trying to prepare the market for the eventuality of a GST of that magnitude? In other words, in terms of central scenarios, is that the size of GST that the government is considering right now?

The second question is, given that the GST is generally discussed in the context of base broadening rather than revenue enhancement, are you considering a GST within the context, for example, of perhaps lowering other direct taxes simultaneously?

FS: Thank you, I am glad you raised that question. First of all, I would like to start off by saying that our internal taskforce report will only be submitted to me by the end of this year, so we will not be able to start substantive discussions on the GST until at least the next year, 2005. I understand there are a lot of concerns in the community about many of the substantive issues: whether it will be very expensive to collect; whether administratively it will be very complicated and thereby for many small and medium enterprises it will be exceedingly difficult for them to comply, as well as the dampening effect it will have on many businesses. So many of these substantive issues will certainly be given a full and complete airing when the issues come up for discussion.

Now, regarding your question of whether we will consider exemptions or other concessions, such as the lowering of the present taxes to compensate for it, let me start off by saying that a GST is more than just a tax reform. It is not meant to be revenue neutral. It is meant to be both broadening a tax base as well as revenue enhancing for us, because we still have a gap in the year '08-'09 on our operating income. So my primary goal is to broaden the tax base, but ideally, it is not a revenue neutral kind of tax.

As far as your question: Why five per cent? There is no particular reason why it is five per cent because I know in the future we will have to go into substantive discussions about whether certain food items should be exempt, or whether some other direct taxes should be reduced so that we will make it more palatable for the majority of our population. So all of these issues will come into play as we start to have these substantive discussions on the GST. And so therefore, I just feel that five per cent is a number that may be a little bit more meaningful than two or three per cent as an introduction. But depending upon the number of exemptions and concessions that we will have to make in trying to forge a consensus on it, I think the percentage can certainly be discussed at a later stage, depending upon the concessions and the exemptions that we will need to consider.

But let me reassure everyone of you here - and through the media sitting at the back - that we will not go ahead with something without fully communicating it. And I think it is essential to good policy-making and essential to good governance that whatever new policy we are considering must be thoroughly discussed and thoroughly considered in a constructive and rational manner by the whole community. So there is no question of us pushing this to the community without first discussing it with the community. So on that front, you have my assurance as long as I am in office.

Question (Paul Zimmerman) West Kowloon is a very big public/private partnership in the making. The experience of Hong Kong is very limited with public/private partnerships - PPP as they are called. I notice from your Budget Speech that you refer to three projects specifically: an ice-sports centre, a tenpin bowling lane, and a water- treatment works plant. Now, given that limited experience, is it wise to go ahead with West Kowloon in this manner?

FS: Thank you very much for that question. I am acutely aware that the development of West Kowloon is under the purview of the Chief Secretary and I am sure he is an extremely capable leader of seeing that project through in a smooth and beneficial way to the Hong Kong economy. Thank you.

Ends/Monday, March 15,2004


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