Broadening the tax base – Reply to the HKSAR Government Presented by : Yvonne Law and Stella Cho Date:29 March 2007

2 © Hong Kong Institute of Certified Public Accountants. All rights reserved. The Submission  Part A – Non-GST options Yvonne Law, Chair of Taxation Committee  Part B – The GST options Stella Cho, Council member and Co- Chair of Working Group on Tax Reform

3 © Hong Kong Institute of Certified Public Accountants. All rights reserved. Background  Government released consultation document (July 2006)  Institute set up working group -Prepare submission -Inform members on tax broadening issues -Canvass views from members -Dedicated website

4 © Hong Kong Institute of Certified Public Accountants. All rights reserved. Background (cont’d) -E-letters on key issues & inviting views -Forums, last one attended by FS -Announced survey results  FS said GST not the only or the main option (December 2006)  Submission to government  Consultation ends on 31 March 2007

5 © Hong Kong Institute of Certified Public Accountants. All rights reserved. Part A – Non-GST options  Increased rates of salaries and profits tax  Decreased personal allowances  Poll taxes  Increased stamp duty on property

6 © Hong Kong Institute of Certified Public Accountants. All rights reserved. Non-GST options (cont’d)  Capital gain taxes  Taxation of interest income  Tax on worldwide income  Wholesale sales taxes

7 © Hong Kong Institute of Certified Public Accountants. All rights reserved. Non-GST options (cont’d)  Taxes on mobile phones and signboards  Selective consumption taxes  Import / export levy  Financial transactions tax

8 © Hong Kong Institute of Certified Public Accountants. All rights reserved. Non-GST options (cont’d) Existing options meriting further study  Increased rates on tenements  Increased stamp duty on stock transactions

9 © Hong Kong Institute of Certified Public Accountants. All rights reserved. Non-GST options (cont’d) New options meriting further study (singly or in combination)  Payroll and social security taxes  A single stage retail sales tax  Air, land and sea departure tax  Green taxes  Surcharge on utility supplies  Dividend tax

10 © Hong Kong Institute of Certified Public Accountants. All rights reserved. Non-GST options (cont’d) Why some options are not suitable  Not broad-based  Increased reliance on direct taxation  Too volatile  Easy to avoid  Complex  Low yield  Combination of the above

11 © Hong Kong Institute of Certified Public Accountants. All rights reserved. Part B - The GST option Broad support for the proposed GST framework (reflects many of the Institute’s recommendations)  Single low rate  Credit invoice type  Destination principle  High registration threshold

12 © Hong Kong Institute of Certified Public Accountants. All rights reserved. The GST option (cont’d)  Commitment to no change for 5 to 10 years  Minimum exemption and zero-rated items  Targeted compensation  Tourist refund scheme

13 © Hong Kong Institute of Certified Public Accountants. All rights reserved. The GST option (cont’d) However, there are  Many unanswered questions e.g. - Administrative and procedural issues -Effects on business especially import/export trade =>creating uncertainty  More information and explanation required

14 © Hong Kong Institute of Certified Public Accountants. All rights reserved. The GST option (cont’d) Issues to be addressed  Lessons from other jurisdictions  Detailed economic and fiscal modeling  Concerns -Impact on low- and fixed-income groups including retirees -Hong Kong’s competitiveness

15 © Hong Kong Institute of Certified Public Accountants. All rights reserved. The GST option (cont’d)  Educating the community e.g. from direct to indirect taxation means -greater choice -encourage saving and investment

16 © Hong Kong Institute of Certified Public Accountants. All rights reserved. The GST option (cont’d)  Type of GST system with rationale explained -Lower rate (e.g. 3 percent) -Adequacy of compensation package

17 © Hong Kong Institute of Certified Public Accountants. All rights reserved. The GST option (cont’d)  Real costs to small- and medium-sized businesses e.g. - Compliance costs -Implications for not registering

18 © Hong Kong Institute of Certified Public Accountants. All rights reserved. The GST option (cont’d)  Impact on import/export trade  Managing the transition - Implementation? - Educational programmes? - GST support services?

19 © Hong Kong Institute of Certified Public Accountants. All rights reserved. The GST option (cont’d)  Unanswered questions: (1) Structural - Who would administer the tax - Roles of the IRD and the Custom & Excise Department - Training of staff - Investigation, enforcement and dispute resolution

20 © Hong Kong Institute of Certified Public Accountants. All rights reserved. The GST option (cont’d)  Unanswered questions: (2) Procedural - Defining registrable entities - Impact of group transactions - Arrangement for bad debt relief - Treatment of goods sold at conventions and exhibitions

21 © Hong Kong Institute of Certified Public Accountants. All rights reserved. GST and tax reform Returning net revenue to the community  Reduce profits and salaries taxes  Incentives for business  Benefits for different groups of tax payers and low-income earners  Study on Hong Kong’s competitiveness

22 © Hong Kong Institute of Certified Public Accountants. All rights reserved.