China’s Greater Bay Area plan should create significant long-term benefits for the people and businesses of Hong Kong and the other ten cities of the Pearl River Delta. Fruition of the plan is likely to see the region become a major driver of global economic growth and innovation.
Achieving the benefits of this plan requires strong cooperation and coordination on multiple issues by the cities involved.
One major and unique challenge in implementing the Greater Bay Area plan is that the area covers three separate currencies, three separate customs areas and three different legal systems.
CPA Australia believes one important way to address this challenge is for the parties involved to establish formal inter-governmental institutions that focus on developing and implementing policies that benefit the Greater Bay Area as a whole.
Complementing this intergovernmental approach, individual cities in the Greater Bay Area, particularly Hong Kong, should consider their own policy reforms that support the regional economic plan.
One policy area where there can be both intergovernmental approaches and unilateral approaches, including by Hong Kong, is tax policy.
Appropriately designed and implemented tax measures can make a significant contribution to the development and success of the Greater Bay Area. Authorities can do this by:
• removing disincentives for people to work in different areas of the Greater Bay Area
• encouraging investment in infrastructure that better connects and services the 11 cities making up the Greater Bay Area
• encouraging innovation to be undertaken in the Greater Bay Area
• supporting the growth of critical industries such as financial services, high-tech manufacturing and e-commerce
• improving the overall business environment in the Greater Bay Area and increasing its attractiveness as a place to work, invest and do business.
The challenge, however, is that the mainland, Hong Kong and Macau each have their own tax policies, which at times may compete with each other.
Given this, CPA Australia member experts in the Greater Bay Area put forward a number of tax reform suggestions for further consideration and research. The proposals include:
• lowering the incidence of mainland tax being imposed on the salaries of Hong Kong and Macau people working in the mainland part of the Greater Bay Area. This could be achieved through a financial subsidy or incentive that reduces the effective tax burden. This could lead to Hong Kong and Macau residents only paying tax at the Hong Kong rate (or the Macau rate if Macau residents) regardless of where they are working in the Greater Bay Area.
• lowering the incidence of mainland tax being imposed on the profits of Hong Kong or Macau resident companies operating in the mainland part of the Greater Bay Area. Like the above salaries tax suggestion, this could be achieved through a financial subsidy or incentive that reduces the effective tax burden on such companies.
• lowering the incidence of mainland tax being imposed on dividends and the income from share disposal derived from investments in Hong Kong shares.
• removing or reducing dividend and withholding tax from profits repatriated from the mainland part of the Greater Bay Area to Hong Kong and Macau
• removing or reducing capital gains tax on Hong Kong and Macau-resident companies operating in the mainland part of the Greater Bay Area
• introducing a profit reinvestment tax exemption for investors that reinvest profit/dividends back into their enterprise operating in the Greater Bay Area, or as a capital investment to set up another enterprise anywhere in the Greater Bay Area.
CPA Australia also suggests that the parties to the Greater Bay Area fund a long-term research project to consider the economic, social and government revenue impacts of moving towards a more harmonized tax regime across the Greater Bay Area. Such a study could also look at what a harmonized regime could look like and set out the options to achieve it.
In addition to the above suggestions that could be considered by all parties in the Greater Bay Area, our member experts recommend that Hong Kong study the viability of the following reforms to its tax system:
• a two-year tax exemption and/or a three year 50 percent reduction in profits tax rate for companies set up in Hong Kong that conduct fund-raising activities relating to supporting other businesses operating in the Greater Bay Area.
• a fully-refundable super deduction of 200 percent of expenditure relating to research and development and innovation undertaken anywhere in the Greater Bay Area by companies established in Hong Kong.
• accelerated depreciation for the purchase and installation of high-tech equipment and machinery anywhere in the Greater Bay Area by companies established in Hong Kong.
• investment credit or tax rebates for companies established in Hong Kong that invest or re-invest their profits in businesses operating in the Greater Bay Area.
Well-considered tax measures should make a large contribution towards encouraging the private sector and workers to embrace the significant advantages of the Greater Bay Area plan.
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