Accounting Essays | Profits That Are Generated In Hong Kong Are Subject To Taxes

Profits Tax: profits that are generated in Hong Kong are subject to taxes, profits of unincorporated business stands at a rate of 15% and corporations at 16.5%. The relationship between Hong Kong and the foreign exchange rate.

The currency in Hong Kong is Hong Kong dollar which is pegged to the US dollar, if Hong Kong government wanted that peg to continue, it should tighten its fiscal deficit. The currency of Hong Kong is an investment asset, many investors diversify their currency allocations, this diversified allocation to the funds of the global investors results in an important cash inflow to Hong Kong.

For the Hong Kong dollar to get part of the allocation, Hong Kong should stabilize its budget in order to attract more foreign investment. Analyze why the government considers launching a broad-based tax.

Narrow tax base

Hong Kong has very narrow tax base, narrow tax base means that the collected revenues do not provide enough revenue to cover the expenditure of the country. If we compare TAX/GDP ratio in Hong Kong compared to other Asia Pacific and OECD countries we find out that Hong Kong has the lowest ratio of TAX/GDP.

Hong Kong has a narrow tax base because the tax base is shrinking since 1998; sound tax systems are based on growing and stable (not volatile) tax base. Hong Kong has the lowest corporate tax rate among the OECD countries, the current corporate tax stands at 16%.

Erosion of Tax Base

The erosion of tax base is actually a result of several factors, such as: sliding house prices, illegal betting, e-commerce and online stock trading. In the following section I will explain each of these factors separately:

Sliding house prices

For a long time, Hong Kong depended on land and property transactions to contribute to government revenue of Hong Kong. Collected tax from property in Hong Kong(stamp duty, rates and shares and estate duties) is well above the international benchmarks as a percentage of GDP, Property from taxes/GDP=24% for Hong Kong against 5% for the OECD and 10% for the Asia Pacific countries).

Reference

Hong Kong Government, Tax Base Study.
Hong Kong depends on Land sales revenues in financing its budget, this has made Hong Kong increasingly dependent on non-tax revenues.
In the tax base study that has been conducted by the government of Hong Kong and KPMG consultancy, the study reports the fact that Hong Kong's non-tax revenue is about 80% of its tax revenues against 16% for OECD benchmark.
Because Hong Kong has enjoyed a buoyant business environment for years, banks started granting credit very easily to businesses, the expansion of credit was accompanied by rising house prices, land prices started going up sharply from 1984 to 1997, Gerlach, S & Peng, W(2002).