Time for HK to step up efforts to lure more multinationals

January 24, 2019 11:12
Hong Kong can't afford to rest on its past successes in luring MNC regional headquarters, observers say. Photo: Bloomberg

As an international metropolis and an externally-oriented economy, Hong Kong has fully integrated into the global community over the years in terms of its systems and way of life.

Given that, the city should fully utilize its strengths and lure more multinational corporations into setting up regional headquarters here, which will help propel economic development and create new jobs.

According to figures provided by the Census and Statistics Department, the number of firms based in Hong Kong whose parent companies are either registered in overseas countries or in mainland China rose from 8,225 in 2017 to 8,754 in 2018.

Among these 8,754 firms, facilities of 1,530 entities are designated as regional headquarters by their parent companies.

At present, all business enterprises in Hong Kong are generally subject to a 16.5 percent profits tax.

The rate might look competitive at first glance.

However, if we take into account the tax concessions program currently applicable to regional headquarters of foreign firms established in Singapore, under which they are entitled to a 5 to 10 percent corporate tax in respect of their eligible economic activities, we can see that Hong Kong is actually much less competitive.

In June 2016, the Hong Kong government amended the Inland Revenue Ordinance, under which eligible corporate treasury centers (CTCs) of foreign firms in Hong Kong would be entitled to a 50 percent deduction in the current profits tax rate.

In the meantime, the law change also provides interest reduction on the servicing expenditures for money borrowed from associated corporate entities outside Hong Kong, a move aimed at encouraging more multinational business corporations to set up CTCs in the city.

Undoubtedly, the 2016 amendments to the Inland Revenue Ordinance marked a significant milestone in Hong Kong’s efforts at facilitating the development of its “regional headquarters economy”.

Still, the territory has been facing increasingly intense competition in the Asia-Pacific region in recent years, as other jurisdictions such as Singapore and Japan have also been working aggressively, by offering juicy tax concessions, to draw more international business firms into setting up regional headquarters on their soil.

As Hong Kong's advantage over other competitors in terms of the low tax rate is continuing to narrow, there is definitely an urgent need for the city to step up its game.

In my opinion, the government should formulate new tax policies to encourage more multinational corporations to establish their regional headquarters in Hong Kong.

For example, any regional headquarters office of foreign firms in the city that meets specific requirements with regard to its size, number of employees and investment totals should be entitled to deductions in profits tax.

Apart from tax concessions, the government should devise other supportive measures in order to foster a better business environment.

For instance, many foreign enterprises or investors often encounter quite a lot of legal and operating issues when setting up regional branches here.

Although the government has established the investment promotion agency Invest Hong Kong, the entity can barely provide direct and timely assistance for foreign companies here that have run into operating problems.

That is because the department is mainly charged with promoting business and attracting foreign investments, and not much else.

To address the shortcomings, I suggest that the administration set up an inter-departmental body to provide support services for foreign firms in Hong Kong, such as offering legal assistance, and allowing these companies direct access to various government departments so as to help them apply for the necessary business licenses.

Attracting more multinational business enterprises will not only help create new job opportunities in the fields of back-end support and professional services, it can also guarantee continued economic growth for the city.

Besides, if we manage to bring in more foreign firms, it will mean a vote of confidence in Hong Kong among the international business community, something that can definitely help boost the city's reputation as an international business and financial hub.

This article appeared in the Hong Kong Economic Journal on Jan 22

Translation by Alan Lee

[Chinese version 中文版]

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Member of Legislative Council (Functional Constituency – Accountancy)