Hong Kong tax system

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Hong Kong's tax system has been establish for about 60 year's old, according to the Article 108 of the Basic Law, it's allow Hong Kong to enforce an independent taxation system and enact its own laws on tax types, rates, reductions, allowances, exemptions and other taxation matters. Hence, to compare with other countries, the system is simpler and the sources of charging the tax are lesser. A-Plus (2005) stated that the fiscal revenue of HKSAR is mainly reliance on the direct tax and reliance on small group of taxpayer, in the normal situation, there is maybe no problems on the fiscal revenue, once there is something happen (like 1999-2000), the government will suffer a serious fiscal deficit. In addition, FHKI (2007) stated that Hong Kong's tax base is narrow and ageing problem and welfare expenditure is became serious, the dependency ration increase, as a result the salary tax income is become unstable, it may affect the revenue of the government. Therefore, broader the tax system in Hong Kong is necessary as it can stable our fiscal income and can tackle the heavy wealth care expenditure for long run.

Why do I interested in this topic is that as a taxpayer, if Hong Kong government want to widen the tax base, our tax liability maybe increase suddenly and may affect our life, therefore, I would interest in this topic and try to find out some possible ways that can stable the revenue of the government and is not widen the wealth gap in Hong Kong.


The following literature reviews concern two issues. The first issue is the tax base of Hong Kong is narrow and a need to broaden the tax base? The second one is concern any methods for Hong Kong to broaden the tax base.

Is the tax base of Hong Kong too narrow and a need for broaden tax base?

"A tax base will be "narrow" if it is not sufficiently broad to protect the revenue from distortions and/or discriminatory effects of taxation on one form of economic activity as opposed to another; and/or if there is inadequate revenue for the purposes required." Said by KPMG. It is truth, if a government does not have adequate revenue for it's own operation, it should be a problem on the tax revenues or consumption pattern of the government.

In 1990, Greig found that when compared with many industrialized nations, Hong Kong tax system is relatively simple and more favorable to the taxpayer. Its cause the tax base of Hong Kong is narrow. The main reason is Hong Kong tax system is based on the "territorial principle", that means only profits that arise in or derived from Hong Kong are subject to tax in Hong Kong. Income from outside Hong Kong is not subject to any form of taxation. I.e. the variations of tax type levied are limited and limited the source of income of the government.

According to the survey done by Advisory Committee in 2001, they drew attention to the operating deficits of the government in 2000-01 budget and summarize that Hong Kong may encounter a serious fiscal problems if they do not solve the problem on the inconsistency of the tax revenues and narrow tax bases. They found that Hong Kong is the lowest taxation jurisdiction of the comparative group when examine on the total tax revenue as a percentage of GDP. The main reason is Hong Kong tax system is run as a simply manner. Furthermore, Hong Kong relies too much on land base revenue and direct tax revenue than The Organization for Economic Co-operation and Development ("the OECD") or Asia Pacific averages. Refer to graph on Appendix 1, more than 70% of tax revenue is come from direct tax in Hong Kong but around 40% in OECD and 50% in Asia Pacific. It can prove that Hong Kong tax base is actually rely too much on the direct taxes rather than goods and services tax when compare to others. In addition, by compare to other developed countries, the tax rate in Hong Kong is relatively lower than other developed jurisdictions (e.g. profits tax rate in Hong Kong is range 16%-17% but 45% in Canada). To sum up, Hong Kong's tax base is narrow because of lower tax rate and limited range of taxes levied.

Another author, Richard (2005) also support Hong Kong tax base is narrow, it bring up two respects. The first is same as the view of Advisory Committee; he agrees that tax base is narrow with respect to the range of taxes that are levied. Another issue the salaries tax net is very narrow and shrinking. HKSA (2000) shows that less than 40% of working population of 3.5 million people paid any salaries tax and about 6.7% of working population contributes almost 80% of salaries tax revenue. The revenue relies on a few of taxpayers and will consist a big problem towards the financial burden. Census and Statistical Department (2009) find that nowadays in Hong Kong, ageing problem becomes more serious and cause welfare expenses increase, hence increase the financial burden. Refer to Appendix 2, it shows the population above the age 70 is continuously increase in these few years (8.7% of total population in 2005 to 9.6% in 2008). As Advisory Committee said, HK tax system is reliance on direct tax (e.g salaries tax), if number of taxpayers reduce, it will cause fluctuation on tax revenue, as a result, there is a need to broaden the tax base of Hong Kong to ensure the Government have sufficient fiscal income and able to tackle any financial burden for long-run.

Andrew (1998) and Richard and Tor (2006) stated that Hong Kong tax base is extremely narrow as well; the reasons are the same as above authors. Richard and Tor (2006) express that a narrow taxation base is that still relies on operationally separate tax schedules for difference types of income such as no general income tax. This point is quite suitable for Hong Kong as Hong Kong tax system actually rely on three main taxes: Salaries Tax, Profits Tax and Property Tax. For the profits tax, according to HKSA (2000), 80% of the profits tax is paid by 5% of taxable business. That mean that whole society is rely on a few taxpayers. Richard and Tor (2006) also identified that Hong Kong tax base has a serious systemic fiscal flaw that needs to be fixed. Besides, they found that Hong Kong tax system is very outdated as reliance by government on the use of land as a revenue-raising oil-like commodity to an extent not seen elsewhere in the modern development world anymore. In 1997, as financial crisis broke out in August and because of the Government's policy on housing, land sales and land utilization, land related revenue declined dramatically in recent years. Its cause the revenue of Government becomes unstable. As there is an actual example, Hong Kong cannot be relying too much on land-base revenue anymore. The main point is Hong Kong needs a tax reform to improve the narrow tax base in order to solve the fiscal flaw. Especially by means of indirect tax as it is not volatile than direct taxes.

According to Daniel (2001), he had done an analysis on Hong Kong Tax Base; he indicated that Hong Kong tax system is retaining a low, simple and predictable tax regime. In general, there are sufficient incomes to fulfill the requirement, but when there is something happened like SARS in 2003, it may be a financial burden for the government to raise fund to solve the problem. Therefore, Daniel suggested that Government should review on the tax system and explore new avenues of imposing direct and indirect taxes to ensure more steady sources and a wider base of revenue for the government.

To sum up all the authors' opinions, Hong Kong tax base is far too narrow. As government expenditure cannot be cut overnight, the Government needs a stable source of revenue to maintain a healthy financial position. Broadening the tax base should be the Government's strategy to stabilize long-term revenue sources and to achieve fiscal balance. As such, government revenue would not fall materially in times of economic depression.

How to choose a suitable reform for Hong Kong?

There is a set of principles that is generally accepted around the world to assess whether the tax system is good or not. OECD also indicated principles for assessing the tax system as well. According to the document "Broadening the Tax Base Enduring Our Future Prosperity" launch by the government in 2006, a good tax system should include the following three points.

The first point is fairness, a good tax system should comply with the "capacity to pay" principle. The design and the support measures of the tax system should ensure that peoples with greater financial capacity would bear heavier tax liability without widening the wealth gap.

Second, provision of a stable and significant revenue; a good tax system should be able to provide a stable and significant revenue for the Government to respond to challenges and needs of the community and create social harmony. A good tax system should work even when there is a change in economic conditions and demographic structure

The last one is maintaining international competitiveness; a good tax system should be clear and simple and be able to maintain Hong Kong attractiveness to international capital and talent

Any methods for Hong Kong broaden the tax base?

Although Government has a surplus about HK$25.4 billion in 2007/08, the government still needs to stabilize revenue, improve public finances, and to provide a buffer for any future economic downturns for long-term. In addition, there are still many voices that Hong Kong tax base is narrow, therefore broaden the tax base is needed for Hong Kong in long-term. Some authors suggest the following methods for Hong Kong to achieve the goal; both of them have their advantages and disadvantages.

Discuss of deduction of Personal Allowances in Salaries Tax

This is a method to increase revenue productivity of existing taxes by reducing the personal allowances in salaries tax calculation. This is a simple and direct method to broaden the tax base as it no need to introduce any new taxes and will not make the tax system more complex.

As Richard and Tor (2006) mentioned, Hong Kong tax system is rely on the personal tax and corporation tax. It's about one-third of the total tax revenue. Reduction of personal allowances of salaries tax would widen the number of taxpayer. Because of some salaries-earners currently paying no salaries tax after the personal allowance, if the personal allowance decrease, some of them would fall into the tax net and become a new taxpayer. The greater number of taxpayers, the greater tax revenue of the government.

According to the study of Advisory Committee (2001), they find that personal allowances of Hong Kong are higher than international standard and it is increased faster than inflation. Therefore, it has a room for government to reduce the personal allowances. They concluded a result on reductions in allowances, if there are a reduction in allowances of 10%, 25% and 50% would respectively yield additional revenue of $2 billion, $6 billion and $14 billion. A total abolition of allowances would yield additional revenue of $40 billion but it does not put into practices.

Although this method can produce extra tax revenue for the government, living standard of low-income family should be concerned. If they fall into the tax net due to the reduction of personal allowance, it would increase their financial burden of those families. Once there is any economic downturn, the income level of resident reduce and number of taxpayer increase due to the reduction, although there are extra income, the income is still limited as those new potential taxpayer have minimal tax liabilities only.

As HKSA (2000) mentioned, nowadays in Hong Kong, salaries tax revenue is shrinking due to ageing problem. Although this is a simple method to achieve the goal, it would not be the best method for Hong Kong.

Discuss of introducing new tax: Goods and Services Tax (GST)

Goods and Services Tax (GST) is a type of indirect tax, it is a value added tax (VAT) that imposed on the goods and services and is wide base, the tax is levied according to consumption and ability to pay tax. If you buy more things, the greater tax you pay. It is capable of yielding sustainable revenue on an ongoing basis.

Hong Kong is the one jurisdiction that does not have any tax on goods and services. It's only having betting duty and duties on petrol, tobacco, diesel etc. Paul (2001) said that GST is an alternative option for broadening the tax base and thereby securing revenue into the future. If implement GST, this will be a new sources of tax income. It seems so suitable for Hong Kong. He also indicated that GST is an efficient and relatively easily implemented way of meeting the objective of the government in relation to broadening the tax base, it can provide the government sufficient revenue to offset implementation costs, including some form of reimbursement for low income earners. Although GST is an effective way to achieve the goal, Paul argues that GST is not as good as we think. He point out a main problem on GST, it will lead to an acceleration of inflation and consequential economic downturn! In the experience of other countries, most of them have the same result. For example, the price increase stabilized fairly quickly when Australia implement GST. Even though it has drawback, Paul stated a good point that "successfully introduced a GST, will be convincing a skeptical electorate that the long-term gains from GST out weigh any short-term pain." Therefore, for long-term goal, GST is still a good alternative method for Hong Kong.

A well-known person named Guy Ellis (partner at PricewaterhouseCoopers) had some opinions in feature of Hong Kong Securities (2006) as well; he agreed that GST would provide a more stable source of revenue for Hong Kong especially during periods of economic downturn. Since GST is a wide base tax, it involves people in difference income classes. Ellis also points out two issues that should be pay much attention. First, GST may affect the living standard of the middle or low-income class and increase the wealth gap. Because of poor and the rich people pay the same amount of tax on the same consumption. The other is GST would hit the retail and tourism industries the hardest and fears of inflationary pressures resulting from a consumption levy are also paramount. With reference to the case of Australia, GST led a one-off change in the price of many items in the economy and affects the low-income class. Hence, to put GST more workable in Hong Kong, the government should consider exemptions or concessions and try hard to keep the burden low for the more dis-advabtaged by taking more studies on the impact bring by the GST.

For the disadvantage of affect the tourism and retail, Frederick, M., (2006) also agree with this point. Hong Kong has a reputation of a "shopping paradise", many peoples like travel to Hong Kong and purchase their favorite goods, if tax is imposed on the goods and services, undoubtedly, it would affect the consumption pattern of the traveler as well as the local resident. Although the tax revenue would increase, the GDP of Hong Kong maybe affected. "In long run the effect will be positive" said by Frederick, hence, in general, he supports to maintain a low GST rate for broaden tax base. It can help maintain Hong Kong's competitiveness, and make a room to attract capital and talent, as well as to improve our business environment.

In addition, Daniel (2001) also suggests GST to solve the problem. It can improve the tax base considerably and reduce the volatility of fiscal income, as it is an indirect tax. Even just 1 percent sales tax would generate revenue of HK$7 billion. Furthermore, he has the same view with the above two author as it would have adverse impact on the retail as well as tourism businesses, also would impose burden on lower income earners. Daniel had state a new point that since Hong Kong is maintain a simple tax structure and preserve its image of low tax regime, once introduce GST in Hong Kong, it is hardly to maintain these two principles and destroy the competitiveness of Hong Kong.

To have a little conclusion, GST can be a method to solve the problem if, and only if the GST is implement at a low rate in Hong Kong.

Discuss of introducing new tax: Green Tax

Green tax is a tax charge on substances that are harmful to the environment, such as plastic bags, tyres and batteries as well as electricity or other forms of energy. Many supporters said this method have two dividends. "First is refers to an improvement in environmental quality, second is associated with a reduction for a revenue-neutrals burden of the tax system by using additional tax revenues for a revenue-neutral cut of existing distortionary taxes." Said by Christoph et al. (2003). If introduced, it would be levied on the "user pays" principle.

In order to widen the tax revenue and improve the environment, Daniel (2001) suggests Hong Kong can introduce green tax. He argues that green tax can encourage economic players to use resources more efficiently and maximize welfare. Also, it indicate that the rationale of the tax is "making the polluter pay" principle, it quite fulfill the principle (fairness) of good tax system. It can bring two advantages for HK, improve the environment and bring additional tax revenue. Walker and Yip (1999) place an example of foreign experience, in Sweden, the government cut taxes on personal income but raised taxes on carbon. The revenue successfully shifted, was SK$14.4 billion, namely HK$14.4 billion. This example proves that green tax can bring additional tax revenue for government. Although this would bring revenue for Government, it would bring additional cost for industrial area as well, and would damage the competitiveness of Hong Kong.

But David (2007) does not support this point. He think that the traditional green tax is not a suitable means for broadening the tax base as this taxes usually involve factors and objectives other than purely fiscal requirements. It's link up the behavior of the taxpayer. If the payer is efficiently using the resources, then they no need pay high tax on it. It would hide a risk that the revenue from green tax is not stable as we think. However David support that green tax can improve the environment of Hong Kong and able us to attract more overseas talent or institutions to work or invest in Hong Kong, thereby to enhance the competitiveness of Hong Kong rather than broaden the tax base for Hong Kong.

In 2000, there are a journal in "The OECD Observer" shows that green tax can generate a favorable revenue, in OECD countries, the revenue from green tax currently average about 2.5% of GDP and around 7% of total tax revenue, the number is quite impressive. "In 2002, revenue from environmental taxes in European Union of 15 Member States accounted for 6.5% of total revenues from taxes and social contribution and 2.7% of GDP." Said by Dr Maria (2005), although it can generate favorable revenue, the author said it should not be the means for broaden tax base, the main purpose of this tax is just a tool for preserve, protect and improve the quality of the environment and to protect peoples' health.

Nowadays, Hong Kong already have plastic bag tax, undoubtedly, it can bring revenue for Hong Kong. But green tax is not the best option for Hong Kong to broaden the tax base. Since green tax would change the behavior of taxpayer in reduce use of energy and environmentally unfriendly substances, the more successful a green tax is, the less revenue the Government will receive in the long term. For long-term goal, it is not suitable for Hong Kong.

Discuss of introducing new tax: Capital Gains Tax (CGT)

Some authors would propose to introduce capital gains tax as a means for broaden the tax base. Refer to graph on Appendix 3, countries around Hong Kong, most of them have CGT but Hong Kong doesn't. Imply that there is a room for Hong Kong to introduce capital gains tax.

CGT is fair tax that it only applies to capital gains and would not widen the wealth gap, quite suitable for Hong Kong as uneven distribution of income of people. Daniel (2001) agrees this suggestion. He said that CGT is based on the equity principle. It can help to reduce inequality in distribution of wealth and reduce investment distortion. Although it does not widen the wealth gap, there are another potential problems that need to pay attention. Daniel has pointed out three problems, the first problem that since this is a tax on gain on capital asset (e.g. property, shares), there are no such a basis for indexation and valuation; consequently, we can't have a precise estimate on the gain and the tax amount maybe wrong. The second problem is this tax is link up with the economic cycle. When there are economic downturns, the value of the capital asset will decrease; the revenue of the government would not be stable and be volatile. The last is the investor would try to invest offshore to avoid tax on their investment gain in Hong Kong. "CGT is likely to have a disproportionately negative effect n Hong Kong's image overseas, as well as acting as an disincentive to investment and entrepreneurship" said by Daniel. It would induce capital outflow and would have a detrimental effect on Hong Kong as a destination for regional share listings and as a regional financial center.

Except for the above disadvantages, many authors point out the main problem of CGT is it would bring "Lock-in effect". Since taxes are deferred until the capital asset is sold rather than the sale processing. Refer to the graph in appendix 4, Leonard and George (2002) prove that when the tax rate is high, the investors would tend to hold the assets for long period and would not realize them to avoid high CGT. When the tax rate is fall, the investors are more likely to sell their assets. Such way is call Lock-in effect. When the investors lock in their assets in such way, the government would loss revenue and affects the efficiency of stock market and property market. Yoshitsugu (1997); Chari et al (2004) and Marco (2008) also support this point. Yoshitsugu (1997) believed that lock-in effect is the most important drawback of CGT. He thinks that this effect would delaying the sale of potential assets and obstructs the development of those assets. Furthermore, Calvin (2009) said lock in capital preventing the capital from shifting from old to better investment; the investor only would sell the old investment when the return can cover the CGT.

Small conclusion, investors would try to avoid high tax by holding the assets in long term, which make the revenue of the government unstable. Therefore, for long term, it is not a good choose for Hong Kong to broaden the tax base.

Other Methods

Except the above methods, there are another two small-scale means that maybe help to broaden the tax base.

Tax on Luxury Goods

This is the tax levied on the luxury goods rather than necessities. It would not increase the burden of low-income class and in-line with the "capacity to pay" principle. According to Yuan (2005), China's luxury goods market already the world's third largest; there is a room for Hong Kong to tax on luxury goods. Elda (1991) said that luxury tax might attempt to reduce the burgeoning deficit for the government. He proposed that levies 10% surcharge on the high priced item that would bring the government about $9 billion for the next five year. Indeed, it would be a new source of income for Hong Kong but there is a problem that there is no internationally or socially recognized definition of luxury goods. Since it only tax on luxury goods, the range is limited, if want to bring significant revenue for the government, the rate must set at a high level. This would have an adverse impact on the retail, tourism industries and reputation of "Shopping Paradise". As a result, to ensure stable revenue, tax on luxury goods is not a good choose.

Land and Sea Departure Tax

It is a tax levied when peoples leave or come to Hong Kong. And the charge is based on "user pays" principle. Since Hong Kong is a tourist spots, Daniel (2001) think that departures tax would provide a reliable and growing source of additional revenue for Hong Kong. At present, only peoples leaving Hong Kong by air and by sea through marine ferry terminals to Mainland China and Macau need to pay tax. How about travelers by land to Mainland China? This tax would eliminate the unfair treatment under which only some passengers leaving Hong Kong are subject to departure tax. Daniel has an estimate on it, along the figure of 1999, if about 39 million land crossing to Mainland China, HK$10 per cross-border passengers, the government would have approximately HK$0.39 billion revenue. It would provide a stable source of income but it would have negative effect on the tourism industry.


There are three main objectives of this study. First, we would like to have a study on the Hong Kong tax system and it's tax base, in addition to examine if it were the case of narrow tax base in Hong Kong and consider whether Hong Kong need to broaden the tax base or not. Second, if broaden the tax base for Hong Kong is needed, we would try to discuss the possible methods that can help Hong Kong to broaden the tax base and examine the advantage and disadvantage of those methods. Third, we would like to evaluate those strength and weakness of the methods and Finally, we would make recommendations and conclusions on those findings and try to find out the most suitable way for Hong Kong to broaden the tax base in long term.

For Literature Review

For the part of study the Hong Kong tax system and it's tax base, firstly, we would try to use the classic textbook for our reference, as those textbook can give us a general knowledge on the tax system. Therefore, we can have a better understanding on the Hong Kong tax system as well as the tax base of Hong Kong. In addition, we would search the journal article in the library's databases to find out some literature that is related to the review on the Hong Kong tax system. Hence, we can have a comprehensive knowledge and review on Hong Kong tax system.

For the part of broadens tax base for Hong Kong is needed. Analytical literatures are used in this part. Same as the part of Hong Kong tax system, we would like to search journals articles via library's database; normally, journal articles from 1980 to 2009 were searched and would use in my study. In general, I would use "tax", "tax reform", "tax base", "Hong Kong" for the keywords to search for the journals. In order to nestle up against to my topic, the articles were mainly from economic, finance and accounting disciplines. The journal articles in the following databases were considered. They include Emerald, Factiva, ISI emerging markets, LEXIS-NEXIS academic universe, ProQuest etc. Mostly, journal article in "Journal of International Taxation", "Accounting & Tax Periodicals", "Asia-Pacific Journal of Taxation" and "National Tax Journal" would be more helpful for my dissertation as those article are create by professional that related to accounting field. Furthermore, search engine such as Google was also used for gather the information as such information from the website would be more updated. Besides, cross-referencing was also used to increase the exploration area of the available articles.

Nonetheless, same as other study, there are some limitations for this method owing to time restraints. First, the Chinese language materials were not searched. Second, only those articles contain the keywords in their titles are included. Moreover, unpublished materials were not included too. For example, a total of English-language 26 articles were found from the databases. Only a total of 23 were directly related to the topic that we are studying - the tax base of Hong Kong. After reading those articles, only 10 articles were used in this dissertation as references.

There is also some strength for this study we finally used. First of all, comprehensive resources, at least 10 different databases were used. Second, foreign experiences were also find in the databases and can be used for the comparisons part. Also, we have also read local government documents and journals. Finally, expert knowledge can also be found via the databases.

For the part of possible methods for broaden tax base, we would use the government consultation document for our reference, it has suggested so many tax reform methods for broaden tax base. Besides, we would also use the journal from the databases as well, as those suggestions from the journals are more objective. Also, from the articles, we could find some tax reforms that were use in other countries, so that we can have a better study on the tax reforms when they are actually in practices.

For Finding - Primary Sources

We have considered different possible methods to conduct this part of the study. Interviews, questionnaires, systematic review, polling were all considered. In the original proposal, we proposed to conduct a large-scale survey by filing the questionnaires to collect opinions of broaden the tax base in Hong Kong by asking corporations and difference professions in Hong Kong. As time is limited, large-scale questionnaires were not made and disturbed in this final report. Instead, we have conducted a small-scaled questionnaire and some interviews with undergraduates who working in financial or accounting industry to understand more about the possible influence of broaden tax base in Hong Kong, if it were to carry out. Since the questionnaire is small-scale, we would use other research done by professional to support the result. Total 200 questionnaires have sent to the target interviewee by email and almost 100 questionnaires replied. This is a simply and time saving method to gather the opinions from the public. It can help us to understand on whether which methods of tax reform they are likely to support and would not against to. After getting those data, we could narrow our choice of selection and would focus the study on particular tax reform. But the disadvantage of this method is the sample is small; respond rate is low, so that it would affect the representative of the result.

For Finding - Secondary Sources

In addition, apart from the questionnaire, we would evaluate those methods were suitable for Hong Kong based on the feasibility of the rules, cultural, historical and political characteristics. We would take the experience from other countries as the reference. Some articles from the databases were mainly on the experiences and consequences of broaden the tax base in other countries. It would helpful for my study to examine whether the methods is possible or not. Particularly, we would consider those Asian experiences, like Japan, Singapore and Korea. Those economic systems are more similar to Hong Kong and easy for us to have a comprehensive study and comparison. A section on the People Republic of China effects also been chosen as well. We believe that the closer relationships between Hong Kong and People Republic of China after 1997 would increase the possibility of aligning the taxation in Hong Kong and Mainland China under one nation.


The topic on broadening the tax base for Hong Kong has been discussed for a few years. On July 2006, the government has released a consultation document on the tax reform in Hong Kong entitled "Broadening the Tax Base, Ensuring our Future Prosperity" However, there are no such a definite answer on how to broaden the tax base for Hong Kong.

Findings from Primary Sources: Questionnaires

In order to know the public's opinion, a small-scale of questionnaire has been carried out. Total 200 questionnaires sent out and almost 100 questionnaires replies though email. The sample of questionnaire is attached in Appendix 5. The finding of questionnaire is as follows: -

Question no.1 to 3 is background information of the interviewee. For question 1, there are above 70% of respondent is undergraduate and only a few of them are at secondary level and about 12% of them are the at professional level. Regarding to question 2, almost two-third of the interviewee work as a clerk in the accounting or auditing field, and the rest of them are work as a professional such as accountant or actually a full time student. For question 3, 62% of the interviewee is a taxpayer in Hong Kong but 38% of them are not.

This background information provides us a better analysis on the views of different type of people on the tax system in Hong Kong and their views on possible choice for Hong Kong to broaden the tax base.

In diagram 1, almost 50% of interviewee agrees that Hong Kong tax is relying too much on land-based revenue or other direct tax (such as salaries tax). 37% of them have no comment on the tax system and 19% of them are disagree against Hong Kong tax is reliance on direct tax.

In diagram 2, about 68% of the respondents agree or strongly agree that Hong Kong tax base is relatively narrow when compare with other similar countries by international standards. For those agree that the tax base is narrow, the reason is that they know Hong Kong's tax system is relying on three main taxes, salaries tax, property tax and profits tax. They think that Hong Kong is too relying on such direct taxes, and it is not an international trend on tax system.

In diagram 3, only 53% of interviewee agree or strongly agree that there is a need to broaden Hong Kong's tax base. They think that Hong Kong's tax base is narrow now, the income is not stable for government to handle the huge financial burden, therefore, they think there is a need to broaden the tax base of Hong Kong in order to get a stable sources of income for the government and help to ensure future prosperity for Hong Kong. But there are about 28% of interviewee do not agree with this question and think that broaden the tax base would bring a tax burden on them and may widen the wealth gap for the low-income classes.

In diagram 4, almost 70% of interviewee agrees that Hong Kong is facing the ageing problem and only 6% of them are not agree. Since Hong Kong tax system is rely on direct tax such as salaries tax for their sources of income, the interviewee worried that nowadays Hong Kong is facing an ageing problem, the peoples become more older and the taxpayers of salaries tax is decreasing, they think that this way of shrinking will have an adverse effect on the government's income and affect the stability of such income. That's why they would suggest Hong Kong should broaden the tax base in order to have a stabilize sources of income and tackle the huge welfare expenditure and handle the routine expenditure.

About 50% of interviewee is considering GST as an alternative reform for broaden tax base for Hong Kong. For those supporters of GST, they think that GST is a good choice for Hong Kong as it is wide base tax that would widen the tax base for Hong Kong. In addition, GST is a consumption tax base on the amount of your consumption, it fulfill the "user pay" principle, as you would pay more tax if you consume more. In opposite, only a few of them (about 27%) are strongly or moderately disagree to implement GST in Hong Kong. The reason for against GST is that they think that it is not a suitable timing for introduce GST as there are a financial surplus in 2007/08. Besides, they think that GST would impose a financial burden on low-income class and widen the wealth gap because everyone is charge on the same rate. Finally, interviewee think that Hong Kong tax system is maintain a simple and low tax rate system, they worried about GST would make the system become more complex and affect competitive of Hong Kong.

If there are additional relief measures on GST, 55% of interviewee would support to introduce GST, almost 5% increase when compare to the answer of question 8 (50% support GST). They think that if government would provide cash allowances or providing other exemption to them, such as medical services, transport services or lower the salaries tax rate, the tax burden of them can be reduce and would not have too much adverse effect to the low-income families. It would be a win-win situation for both low-income class and government. Residents can reduce tax burden and government can have a stable sources of income. For opposite side, there are 17% that do not support GST, as they don't think the relief measures would have a great help for them.

For those supporter support GST, most of them (72%) think that it would affect the living standard of low-income class. But they do not think that it would be an obstruct for introduce GST as government is concern to introduce GST at low-rate and would provide some relief measures on it to reduce the influence of GST.

Apart from GST, the interviewee would support to use Green Tax to broaden the tax base, it about 38% support that. The reason for choose green tax is they think it is a new sources of income for the government just like plastic bag tax implement in Hong Kong in 2009. In addition, they believe that green tax can help to improve the environment of Hong Kong as well; hence it can enhance the competitive of Hong Kong and attract more talent investors to Hong Kong.

Except green tax, the second best choice is tax on luxury goods (27%), they believe that this tax would have the least effect on the low-income class; only the people who have ability to buy the luxury goods need to pay tax. This tax fulfills the "user pay" principle as well. But one thing they concern it that the definition of luxury goods, as there are no such a standard/definition on what is a luxury goods.

The third choice hold 21% of supporters, it is capital gains tax, they believe that it would be a good choice as capital market at that moment is heavy trading, so many capital inflow in Hong Kong, it would be a good sources of income for government. But one issue need to concern is that it may affect investor's behaviors and may affect overseas investors to make investment in Hong Kong and finally would cause a capital outflow in future.

The rest of them are support land and sea departure tax (9%) as to be fair to all travelers both come from/to Hong Kong. The remaining 5% have suggested other choice such as tax on interest/dividend or high tax on cigarette.

Findings from Secondary Sources: Foreign experiences

Reference List:

Tax Base

  • A Broader-Based Tax System for Hong Kong? (Advisory Committee 2001)
  • Andrew, H., (1998). The Hong Kong Tax Paradox Or Why Jurassic Park Exists in the Pearl River Delta. Revenue Law Journal, 8(1), pp.1-36.
  • Broadening the Tax Base Enduring Our Future Prosperity (2006). Other Options for Broadening Tax Base. Available from: http://www.taxreform.gov.hk/eng/pdf/Other_options.pdf [accessed 09.09.2009]
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