Policy Address 2019: I&T, IT, R&D – More More MORE!

As Hong Kong chief executive Ms Carrie Lam is scheduled to unveil the 2018-2019 Policy Address this Wednesday, different parties have now put forward suggestions on boosting innovation and technology (I&T) for the city.

In February, financial secretary Mr Paul Chan Mo-po set aside $50 billion in the 2018-19 Budget for promoting I&T, which has been a focus of Ms Lam’s administration.

But some want more, believing you can’t get too much of (what they think is) a good thing.

Staking out a position

Regardless of the fact that the Policy Address is tomorrow and any deep consideration of recommendations needed to be done months ago, Entrelink, a local association working with tech startups, released a report last Tuesday with some recommended measures for the upcoming Policy Address on fostering I&T.

“In short, we advocate retaining talent and connecting startups with manufacturers,” says Mr Raymond Mak, founder of Entrelink.

“Hong Kong needs talent for the new economy. On the other hand, some startups are entering the harvesting period and will need to mass-produce their products, but they lack experience in manufacturing,” he explains.

Entrelink calls for reserving $6 million to enhance career prospects of STEM graduates in order to enlarge the workforce for the I&T sector.

It also suggests building connections between startups and manufacturers in nearby regions through utilising existing networks managed by various government institutions, and injecting $1 billion to encourage university-industry collaboration.

Falling behind

According to Entrelink’s report, Shenzhen and Singapore are already ahead of Hong Kong in both research and development (R&D) personnel and expenditure per capita of workforce.

For every 1,000 workers, there are only 7.4 engaging in R&D in Hong Kong, compared to 22.15 in Singapore and 25.25 in Shenzhen.

“Although the government aims to raise Hong Kong’s total spending on R&D from 0.79 percent to 1.5 percent of GDP in five years, the target still falls behind a number of nearby regions such as Singapore (2.2 percent) and Shenzhen (4.05 percent),” says Entrelink.

“Innovation with hardware support has become increasingly difficult for startups, as Hong Kong remains heavily reliant on traditional industries to bolster a manufacturing sector that has shrunk by a third in the past decade,” the group notes.

The bean counters concur

Entrelink’s vision is shared by accounting firm PwC, which advocates tax incentives to promote a diversified economy and bolster R&D.

“Achieving broader tax incentives across industries allows businesses to plan a future of mobilising talent and technologies to drive innovation, and reduce Hong Kong’s exposure to macroeconomic risks,” says Mr Jeremy Choi, PwC Hong Kong Tax Partner.

The four pillar industries – financial services, tourism, trading and logistics, and professional and producer services – have contributed close to half of Hong Kong’s GDP and employment during the past decade.

PwC calls for greater deduction on R&D activities to cover subcontracting R&D arrangements outside Hong Kong.

Currently, there is a 300 percent tax deduction for the first $2 million of eligible R&D expenditure incurred by companies, then a subsequent 200 percent tax deduction for the remaining expenditure.

Hong Kong-based startups, due to their smaller scale, may outsource part of their R&D work to their peers in the nearby cities because of the lower costs or division of labour.

Mr Mak from Entrelink says he “absolutely welcomes” such initiatives.

PwC also says small and medium startups could benefit from this and other measures such as refundable credits of R&D expenditure.

It also suggests unilateral foreign tax credits to avoid potential double tax on royalty income received by Hong Kong Intellectual Property (IP) companies from non-treaty jurisdictions.

“These measures will strengthen Hong Kong’s position as an IP hub within the region. The government should also consider introducing a reduced profits tax rate of 8.25 percent for IP companies setting up their R&D base in Hong Kong,” says Mr Choi.

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