PRESS RELEASE

LCQ1: Proposal to introduce dividend tax

************************************************

Following is a question by the Hon Lau Chin-shek and a reply by the Secretary for Financial Services and the Treasury, Professor K C Chan, in the Legislative Council today (July 11):

Question:

Last month, the former Financial Secretary released the Final Report of Public Consultation on Tax Reform, concluding that public awareness on the deficiencies of a narrow tax base had been raised. However, the Report did not put forth any concrete options for broadening the tax base. As many large companies have allotted their shareholders hundreds of millions of dollars of dividends because of favourable results in recent years and that dividends are the main source of income for the major shareholders of many large companies, will the Government inform this Council whether it will consider introducing a tax on dividend income of significant amounts, for example, a hundred million dollars or more, so as to broaden the tax base and generate substantial revenue; if it will, of the details; if not, the reasons for that?

Reply:

Madam President,

The Administration issued a Consultation Document on Tax Reform in July 2006. During the consultation, members of the public generally agreed that Hong Kong's tax base was narrow, and had expressed various views on how to broaden our tax base. In response to the question raised by the Hon Lau Chin-shek, I will focus on the proposal to introduce dividend tax.

During the consultation, there were divergent views on whether dividend tax should be introduced. Those in favour of this option consider that as dividend income is taxed in many overseas economies, Hong Kong could follow this common practice. However, those opposed to the proposal are concerned that the introduction of dividend tax would easily lead to double taxation on corporate income. To avoid double taxation and effectively prevent tax avoidance, complex legislation and tax credit mechanisms would be required. This would complicate our simple tax system and would not be conducive to Hong Kong's long-term development. Besides, some doubt if dividend tax can provide a significant and stable revenue source for the Government. Under Hong Kong's territorial source principle of taxation, the tax would only apply to dividend paid by Hong Kong companies, and investors may choose to invest in overseas companies in order to avoid the tax. Revenue from dividend tax is also easily affected by economic cycles and corporate dividend policies. Generally speaking, dividend payout will decrease during economic downturns, when corporate profits are lower. On the other hand, even if companies have made profits, some of them may choose to re-invest their profits instead of paying out dividends. In considering the proposed introduction of dividend tax, whether to be levied on all dividend income or only on dividend income of significant amounts, due regard should be paid to the above-mentioned pros and cons.

Although members of the public have generally gained a better understanding of the problem of our narrow tax base in the consultation exercise and they agreed that the problem should be addressed, there have not been any clear inclination or mainstream views on which options, including the introduction of dividend tax, should be adopted to broaden our tax base. As the introduction of any new tax would have important and far-reaching impact on people's livelihood and the business environment of Hong Kong, further in-depth discussions would be necessary.

As stated in the Final Report of Public Consultation on Tax Reform, the Government will continue to study options for broadening the tax base and take into full account the views collected in this consultation exercise. We will consult the public further on those options which are more practical at a suitable time in the future.

Ends/Wednesday, July 11, 2007
Issued at HKT 14:50

NNNN