Last month, I shared some basic thoughts immediately before Chief Executive Carrie Lam’s maiden address. Let’s do a quick recap on her policies aside from housing (although an important topic, but not the focus of this particular newsletter).
The underlying message conveys a vision for Hong Kong to head towards a “let’s bunker down and create a better Hong Kong for the next generation”. Which begs the question, has Hong Kong simply been treading water the past 15 years OR is this atypical “spin-doctoring” to win votes but with no real execution plan or milestones for accountability?
It seems that the government is looking to double down in Innovation & Technology (I&T) and Creative industries where Hong Kong has a “competitive edge and much potential.*” Take a look at the numbers:
Innovation & Technology – Total $14.2 billion
- $10,000 million for University research funds
- $3,000 million for student scholarships along with postgraduate programmes
- $500 million in a “Technology Talent Scheme”
- $700 million to develop Hong Kong into a Smart City
Creative Industries (apparently specifically the design industry) – Total $1billion
- $1 billion into the CreateSmart Initiative
Roughly $15 billion in investing in the future. Not bad in isolation, but comparatively, the Shatin to Central Link cost roughly $100 billion ($79.8 billion + $20 billion) **? Suddenly, $15 billion doesn’t seem like much.
More specifically, $0.7 bilion to develop Smart City projects is extremely low. Especially compared to Singapore’s S$2.4 billion (HK$13.7 billion) budget to spend on Smart City initiatives***. Perhaps, a more objective question, what Smart City deliverables should we expect from a $0.7 billion investment?
Let’s take a look at two items that will directly benefit SMEs.
Tax Rate Reduction
We have all by now heard of the 8.25% profit tax (for the first HK$ 2 million profit). How the rate will evolve afterwards is still unclear, but there aren’t many nations in the world that provide such a simplistic and incentivized tax scheme for corporations.
How is your business ready to benefit from this? Perhaps after this legislation passes in 2018, it’s simply a good time to register a profit? Or more complex matters such as potential entity restructure within the new tax boundaries?
Sadly, Hong Kong has had incentivizing tax rates for a long time now, but will the benefit of this additional tax reduction smooth over the difficulties in Talent Acquisition, Office/Storefront Rental or Archaic Beauracracies? Let’s not forget the increasing difficulty to open a company bank account which is one of the most basic necessities for any business (there are organizations out there that can help you with business banking facilities. Check out Neat).
Research and Development Deductions
I suppose the biggest carrot would be in R&D. A 300% tax deduction for the first $2 million spent on eligible R&D was stated in the address. Coupled with a halved corporate tax rate, that’s a huge incentive, but also opens up issues such as “what is eligible research and development?” and “does the Inland Revenue need to re-interpret their stance on R&D conducted by HK companies in light of the increasingly common, digitally nomadic (offshore) work culture crucial to this business phase?”****
Details on her statement need to be clarified, but just as importantly how will your firm start accounting for the R&D that’s performed to benefit from this policy?
Get ready to capitalize on these policy changes. Obviously, as an accountancy firm, our shameless sale line – make sure your accounts are in good shape to start!