Hong Kong will raise taxes on profits and salaries, the first increase in almost two decades, as the government tries to plug a record budget deficit.
Taxes on company profits will be raised by 1.5 percentage points to 17.5 percent and taxes on personal income by 1 point to 16 percent, Financial Secretary Antony Leung (
The tax increases may hamper efforts to lure financial companies and multinationals to Hong Kong, where inward investment fell by almost two-fifths in the first nine months of last year.
Tax rates remain below those of Singapore, a rival center for companies' regional headquarters, which taxes both profits and personal income at 22 percent.
"I don't think the market is going to like higher taxes very much but there's an air of realism," said Percy Weatherall, managing director of Jardine Matheson Holdings Ltd.
"I applaud low taxes and a simple tax system, but I also recognize that the government has an issue," Weatherall said.
Today's tax increases won't come as a shock to investors, having been flagged by Chief Executive Tung Chee-hwa (
GDP expanded 2.3 percent last year, compared with 0.6 percent growth in 2001, and may expand 3 percent this year, Leung said.
"I don't think the tax increase will be high enough at this stage to cause a change in investors' sentiment," said Lloyd Deverall, the partner in charge of taxation services at KPMG.
"People come to Hong Kong because it's a good place to do business," he said.
Mostly, that reflects the city's links with China, whose economy grew 8 percent last year, according to the Beijing government.
Hong Kong's economy, by contrast, has suffered two recessions since the Asian financial crisis of 1997 to 1998. Property prices have dropped by almost two-thirds and the city's jobless rate has more than tripled, eroding consumer confidence and spending.
Leung also said the government will raise property tax to 16 percent. It will increase airport taxes to HK$120 from HK$80, raising HK$400 million.
The government will also lower the threshold for salaries tax to HK$100,000 a year from HK$108,000 per person, adding about 90,000 taxpayers. Leung said a sales tax may need to be introduced, though it won't be levied now. The government will exempt offshore funds from the profit tax.
Leung said the tax changes will generate HK$6.8 billion in revenue.
Until the late 1990s, Hong Kong managed to maintain low taxes and a budget surplus because of sales of government land.
That revenue has shriveled during the property slump. The government predicts the budget deficit in the financial year ending March 31 will be as high as HK$70 billion (US$9 billion), up from last year's HK$63.3 billion, 5.5 percent of GDP.
The Basic Law, Hong Kong's mini-Constitution, requires the government to balance the budget.
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