Chief Executive's Policy Address: Tax Policy Updates

The Chief Executive's first Policy Address that was held on 11 October 2017 provided new information about two tax initiatives: (1) a two-tier profits tax system for enterprises, and (2) a super deduction for eligible research & development ("R&D") expenditure. A press release of the Inland Revenue Department noted that a bill to implement the two initiatives will be submitted to the Legislative Council as soon as possible.

The Chief Executive also noted that Hong Kong will actively seek to sign more comprehensive tax treaties with other economies. These developments suggest that the Hong Kong Government is adopting a proactive approach to promoting policy goals through tax measures.

Two-Tier Profits Tax System

In her election manifesto, the Chief Executive suggested introducing a two-tier profits tax system that would reduce the profits tax rate to 10 percent on the first HK$2 million of profit for enterprises. As announced in the Policy Address, it is now proposed to reduce the profits tax rate to 8.25 percent (half the current standard rate of 16.5 percent), on the first HK$2 million of profit for enterprises. The standard profits tax rate of 16.5 percent would remain unchanged for profit beyond HK$2 million.

The Chief Executive also stated that restrictions would be introduced such that each group of enterprises may only nominate one enterprise to benefit from the lower tax rate, as the intended target of the tax benefits is primarily small and medium enterprises.

Super Deduction for R&D Expenditure

The Chief Executive also suggested in her election manifesto to introduce a super deduction for R&D expenses. As announced in the Policy Address, the Chief Executive proposes that the first HK$2 million of eligible R&D expenditure will enjoy a 300 percent tax deduction and 200 percent for the remainder.

Other Tax-Related Announcements

The Chief Executive expressed the need for the Hong Kong Government to actively enhance its role in boosting Hong Kong's economic vibrancy through efforts in various areas including taxation.

She stated that the Hong Kong "Government will actively seek to sign free trade agreements (FTAs), investment promotion and protection agreements (IPPAs) and comprehensive avoidance of double taxation agreements (CDTA) with other economies, including those along the Belt and Road to open up markets."

Finally, she referred to Government plans to implement the Voluntary Health Insurance Scheme in 2018 and amend tax legislation to offer tax incentives for members of the public who procure such health insurance products.

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Baker McKenzie

Associate, Baker & McKenzie