Tax cuts right for SMEs; next step: productivity

October 30, 2017 11:46
Chief Executive Carrie Lam has cut tax on company profits to 8.25 percent from 16.5 percent for the first HK$2 million of earnings. Photo: HKEJ

Recent tax cuts for SMEs announced in the chief executive’s first policy address will provide a boost to the economy, and further cement Hong Kong as a place to do business. The government should now focus its attention on productivity improvements

Hong Kong Chief Executive Carrie Lam gave her maiden policy address at the Legislative Council on October 11, 2017, outlining her government’s priorities for the year. Included in this was a significant tax cut for small and medium enterprises (SMEs), cutting the tax on company profits to 8.25 percent from 16.5 percent for the first HK$2 million of earnings.

This is sure to have a positive effect on the economy. There are approximately 330,000 SMEs in Hong Kong, constituting over 98 percent of the SAR’s business establishments and employing about 46 percent of the workforce in the private sector.

This is also part of a broader story of Hong Kong positioning itself as a genuinely open and easy place to do business. According to the CATO Institute’s Economic Freedom of the World: 2017 Annual Report, Hong Kong ranks number one in economic freedom, scoring high marks for personal choice, voluntary exchange, freedom, security of the person and privately owned property among other things .

The report also adjusted, for the first time, the rankings for gender equality, so countries who do not legally accord the same level of economic freedom for women as for men score lower – fitting given the city’s CEO is a woman.

Hong Kong is a very good place to work. It is incredibly secure with very low rates of crime and excellent public services. It is quick and efficient to acquire licenses, and it is a financial hub and so access to credit and other banking services are much easier.

Businesses benefit from a favorable territorial tax system, whereby profits realised outside of Hong Kong are not taxed. A Hong Kong company with profits of US$350,000 will only be taxed US$36,465, so its owner will bring home US$313,535 without any additional taxes. Taxes in general, though, are low.

The pro-business environment has resulted in growth. According to new research released in early 2017 by the Chinese University of Hong Kong (CUHK) Business School's Center for Entrepreneurship and Hong Kong Baptist University's School of Business, entrepreneurship in both Hong Kong and Shenzhen is on the rise, despite declining in other areas of China, and there is a growing startup scene.

So, the latest measures put in place by the chief executive are welcome and may well help Hong Kong retain and even further its position as one of the easiest places to do business in Asia.

However, Lam should not stop here. Hong Kong still faces some challenges, ones that tax cuts alone won’t fix. For instance, Hong Kong recently saw a 1.93 percent drop in productivity per a report from the Workforce Analytics Institute. Singapore even knocked the SAR off the top spot as the region’s most productive city, according to CLSA Ltd., a brokerage firm.

Skills shortages are one reason for this, and are already costing Hong Kong. According to a recent survey by Robert Half, three in four chief financial officers  are experiencing talent shortages, to such an extent that it is affecting their productivity and revenue, and many are experiencing significant competition from abroad .

Hong Kong should follow up these tax cuts with measures designed to promote productivity, either through technology adoption or employee skills training (or both)  -- grants for employee training courses, tax cuts of income derived from new technology, for example.

Hong Kong is building on its hard-earned reputation as a great place to live and do business, but like many other countries, it needs to prepare itself for a future of automation and increased competition. The SMEs have been given some much-needed breathing space with these tax measures. It's time to nudge them toward higher productivity.

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CEO of Alpadis Group Hong Kong