With no shocks, few surprises and, certainly, no rocking of the fiscal boat, Hong Kong's 2016-17 Budget, which offers a slew of tax sweeteners, proves to be an uncontroversial issue despite the great public clamor for a comprehensive review of the city's tax regime and its tax base to be broadened to resolve a potential fiscal deficit amid a struggling economy.

Under the current tax system, only 9 percent of companies in Hong Kong are required to pay profits tax, 5 percent of which are the highest taxed, and contribute to a staggering 85 percent of the overall profits tax revenue, according to Financial Secretary John Tsang Chun-wah.

At the same time, less than half of the city's citizens are required to pay salaries tax, 5 percent of whom are the highest taxed and contribute to 60 percent of the overall salaries tax revenue.

Davy Yun, tax services partner at Deloitte, said he was rather disappointed to see a dearth of measures by the government to widen the city's tax base and review its outdated tax system, which, however, hasn't been examined for some 40 years.

He believes the SAR should urgently consider innovative approaches to expand its tax base before any structural financial deficit emerges.

Stephen Wong Yuen-shan, adjunct associate professor at the Institute for China Business under the University of Hong Kong's School of Professional and Continuing Education, noted that Hong Kong's narrow tax base stands as a "long-term thorny issue" and must be tackled as early as possible despite the foreseeable tremendous resistance.

Tax reform is always regarded as an especially sensitive topic, he pointed out, and notwithstanding that the government's own statistics speak volumes that the growth of public expenditure will continue to outpace growth in revenue.

Wong believes it's by no means a way out to provide short-term tax sweeteners to win "applause". Instead, the SAR government should train its eyes on the city's long-run development, such as Hong Kong's economic competitiveness.

He expressed concern that there seems to be no indication of how the government intends to fund rising public expenditure over the next decades.

For instance, a dedicated provision of HK$200 billion, set aside for a 10-year hospital development plan, is not covered by the city's HK$860 fiscal reserves. So, it remains a question as to where Hong Kong should get the money, especially in light of the demographic challenges posed by the city's rapidly aging population and ongoing drawdown in the local workforce.

Yet, the burning need to revamp the city's tax regime appears to be well noted by the government.

Tsang told a radio program last month that Hong Kong's narrow tax base rings true, which makes the government revenue subject to great volatility when economic uncertainties mount.

However, he noted it's somewhat difficult right now to require taxpayers to pay more tax or reform the current tax system, given that the government still has a financial surplus.

Moreover, what makes Hong Kong attractive to foreign investment lies in its simple tax regime with lower tax rates, which have lured many foreign companies to relocate to the SAR, offering enormous job opportunities and helping the city's unemployment rate to hold steady at 3.3 percent despite the sustained economic slowdown, Tsang said.

He reiterated the government will review the existing tax regime now and then, and may introduce the contentious Goods and Services Tax at an appropriate time.

sophia@chinadailyhk.com

(HK Edition 03/08/2016 page9)