200. Our revenue comes mainly from five sources, namely profits tax, land premium, salaries tax, stamp duty and investment returns on fiscal reserves. Together they account for three quarters of our total revenue. Highly susceptible to economic fluctuations, they are affected by the ebb and flow of the economy. Revenue from these sources has fluctuated wildly over the past decade, bringing many challenges to the management of public finances.
201. During the budget consultation period, some people suggested tax deductions for business or personal spending in particular areas such as rent, children’s education, medical services, insurance and the purchase of products with Grade 1 Energy Efficiency Labels.
202. I fully understand that these suggestions are meant to reduce the burden of taxpayers or operating costs of businesses. However, I would like to point out that our simple and low tax regime has stood Hong Kong in good stead and contributed to our success over many years. Various types of allowances and deductions which are very generous are already provided under the current tax system. We must be extremely cautious when considering tax deduction proposals of any kind.
203. As far as profits tax is concerned, all operating expenses and capital expenditure permitted by the law are deductible from taxable profits. Currently, nearly 90 per cent of companies do not have to pay tax. Some have suggested that we should introduce "group loss relief" and "loss carry-back" arrangements and tax concessions for specific sectors or enterprises. When considering these suggestions, we need to take into account various factors, such as whether the proposals will further narrow our tax base and restrict the source of tax revenue to a handful of enterprises, making our tax revenue unstable.
204. In view of this year’s economic forecast, and in support of our enterprises, I have put forward proposals, such as offering a one-off reduction of profits tax, waiving the business registration fees, halving the charges for import and export declarations and abolishing capital duty levied on local companies. These measures will benefit enterprises of different sizes in Hong Kong without compromising our established tax neutrality principle or being in favour of a particular type of enterprises.
205. Turning to salaries tax, the personal allowances currently available to taxpayers, including basic allowance, dependent parent allowance and child allowance, are provided having regard to their basic needs and additional financial burden arising from family responsibilities. The introduction of deductible items for various expenses of a private nature will make our tax system less flexible because individual taxpayers without the need to pay such specific expenses will not benefit from these deductions.
206. That said, I fully understand the financial burden of the middle class in areas like housing, education, and health care. In view of this year’s economic situation and the needs of taxpayers, I have proposed one-off salaries tax reduction and adjustments to various personal allowances or deductions, including basic allowance, single parent allowance, married person’s allowance, dependent parent allowance, child allowance, dependent brother/sister allowance, disabled dependant allowance, and the extension of the entitlement period for the tax deduction for home loan interest.
207. We have been striving to maintain a simple and low tax regime. According to the survey results of Invest Hong Kong and the Census and Statistics Department, our simple and low tax regime is the key favourable factor for Hong Kong as a location for setting up regional headquarters, regional offices or local offices. Paying Taxes 2012-The Global Picture published by the World Bank at the end of last year pointed out that Hong Kong was ranked among the top in the world for the ease of paying taxes. Among the advanced economies, Hong Kong is also one of the places with the lowest total tax rate. These suggest that the tax system in Hong Kong is a positive factor underpinning the competitiveness of Hong Kong enterprises.