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LCQ7: Profits tax regime


Following is a question by the Hon Jeffery Lam and a written reply by the Secretary for Commerce and Economic Development, Mr Frederick Ma, (in the absence of Secretary for Financial Services and the Treasury), in the Legislative Council today (January 30):


Quite a number of chambers of commerce and professional bodies have proposed introducing the arrangements of "group loss relief" and "loss carry-back" for corporate losses under the profits tax regime. The former allows losses of one or more companies to offset profits of other companies of the same group while the latter allows losses to offset profits made in previous years so that the company concerned can get a refund on tax paid. In this connection, will the Government inform this Council whether:

(a) it had conducted any study on the introduction of the above two taxation arrangements in the past two years; if it has, of the results of the study;

(b) it knows the countries which currently implement these two taxation arrangements, and the impact of such arrangements on their economy; and

(c) it will reconsider introducing these two taxation arrangements; if it will not, of the other new taxation arrangements it will implement to improve the business environment and enhancing the competitiveness of Hong Kong?


Madam President,

(a) The Government has studied the proposal of introducing the arrangements of "group loss relief" and "loss carry-back", but considers that these two arrangements may result in significant loss of tax revenue. The revenue implication would be particularly acute during economic downturns. Besides, the two arrangements could be abused easily for tax avoidance. Complicated legislative provisions would be necessary to define clearly the scope of the arrangements so as to guard against abuse. However, this would complicate our simple tax system, and substantial resources would also be required to scrutinise and investigate claims. Therefore, we consider that it is not desirable to introduce these two arrangements.

(b) Countries implementing "group loss relief" include Australia, Japan, Malaysia, New Zealand, Singapore, the United Kingdom and the United States. Countries implementing "loss carry-back" include Korea, Singapore, the United Kingdom and the United States. Application of the arrangements varies among the above countries. We do not have information about the effect of the two arrangements on the economies of those countries that implement them.

(c) For the above-mentioned reasons, we do not consider it desirable to introduce the two arrangements. However, we will continue to listen to the views of the business and professional sectors in this respect. Hong Kong has relied on its low tax rate and a simple, transparent and fair tax system to attract investors. Regarding the loss set-off treatment in Hong Kong, we allow loss to be carried forward without time limit to offset profits in future years. This arrangement is more favourable than those of many other countries. To further improve the business environment and enhance the competitiveness of Hong Kong, the Chief Executive has proposed in the 2007 Policy Address that the corporate profits tax rate be reduced by one percentage point to 16.5%.

Ends/Wednesday, January 30, 2008
Issued at HKT 11:06