New super tax deduction may not be as inclusive as it seems

In order to encourage R&D to be conducted in Hong Kong, the government proposed in its new budget a super tax deduction of 300 percent for the first $2 million of R&D expenditure, meaning that companies can base their tax reduction on three times the cost of their R&D expenses. Investment above that level enjoys a 200 percent tax deduction.


This applies to “all qualifying R&D expenditures”, and the government will seek views from stakeholders in formulating the proposed tax measure with the aim to implement the proposal within 2018.

“It’s the first time ever the Hong Kong government proposed a super tax deduction,” said Grace Tang, Chairwoman of the Taxation Committee of the Hong Kong General Chamber of Commerce, at a panel discussion on March 14 regarding the 2018-19 Budget. “But the question is: what do we mean by qualifying R&D? What kind of activities are qualified to enjoy the super deduction?”

Tang said she recently had a discussion with the Innovation and Technology Commission that’s promoting this initiative, and the same question was raised. The Commission’s said it will “rely on the current definition of R&D in the current legislation section 16B”.

But there is a catch.

“This would exclude certain activities,” said Tang. “They intend to capture innovative activities involving the advancement in science and technology, but activities of feasibility studies, or market and business research are excluded.”

“So quality control, routine testing – all of these would not fall into the qualifying definition,” she added. “If [the government] further carve out certain activities, then we have to consider whether this is effective in terms of the initiative.”

Tang also mentioned that if companies don’t have sufficient internal resources to do their own R&D, they are most likely going to sub-contract it to a third party. However, under the current legislation, if their contractor is not one of the five government-designated R&D institutions, the companies would have no chance in getting the super tax deduction.

To increase the attractiveness of Hong Kong’s tax regime and cement Hong Kong’s role as the super-connector under the Belt & Road (B&R) as well as the Greater Bay Area (GBA) initiatives, Tang offered her suggestions to the government.

Tang suggested the government to grant enterprises the option to convert the super tax deductions into a cash subsidy or refundable tax credit, while expanding the coverage to include subcontracted R&D activities as well as R&D activities undertaken outside Hong Kong.

She compared the key features of super tax deductions in Hong Kong with that in other jurisdictions. For example, UK’s super deduction of 200 percent is only given to SMEs. Bigger tax-paying enterprises, on the other hand, can convert their qualifying R&D activities into credits for other tax payments.
“I’m not saying that Hong Kong must follow other jurisdictions, but based on what we’ve learnt from them, we can recommend the government to consider building more meaningful features into the R&D incentives.”

Tang also believes that establishing a Hong Kong/ Shenzhen Innovation and Technology Park preferential tax zone would further encourage innovation.

“We’re happy the government has taken the initial step by developing the Technology Park in Lok Ma Chau Loop, but there’s no tax incentive mentioned at all,” said Tang. “In order to attract enterprises and talents to go and work in this park, maybe we should consider offering preferential treatment to companies such as lowering the corporate tax rate, or 50 percent deduction of taxable income to attract professionals.”

Tang finally suggested tax concessions from the mainland China and Macau tax authorities for Hong Kong residents frequently traveling to work in GBA, so that relevant Hong Kong taxpayers are only required to pay Hong Kong salaries tax and are exempted from individual income tax in mainland China and Macau.

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